{"show":{"id":"5cOfqdkomvzyhPTR7n6KFa","uri":"spotify:show:5cOfqdkomvzyhPTR7n6KFa","href":"https://api.spotify.com/v1/shows/5cOfqdkomvzyhPTR7n6KFa?market=AU&locale=*","name":"Thoughts on the Market","type":"show","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"episodes":{"href":"https://api.spotify.com/v1/shows/5cOfqdkomvzyhPTR7n6KFa/episodes?offset=0&limit=50&market=AU&locale=*","next":"https://api.spotify.com/v1/shows/5cOfqdkomvzyhPTR7n6KFa/episodes?offset=50&limit=50&market=AU&locale=*","items":[{"id":"4CDKtwYgup72veuKylW4gv","uri":"spotify:episode:4CDKtwYgup72veuKylW4gv","href":"https://api.spotify.com/v1/episodes/4CDKtwYgup72veuKylW4gv","name":"Tariff Fallout: Where Do Markets Go From Here?","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"As markets continue reacting to the Trump administration’s tariffs, Michael Zezas, our Global Head of Fixed Income Research and Public Policy Strategy, lists the expected impacts for investors across equity sectors and asset classes.Read more insights from Morgan Stanley. ---- Transcript -----Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income Research and Public Policy Strategy. Today we’ll be talking about the market impacts of the recently announced tariff increases.It’s Friday, April 4th, at 1pm in New York.This week, as planned, President Trump unveiled tariff increases. These reciprocal tariffs were hiked with the stated goal of reducing the U.S.’s goods trade deficit with other countries. We’ve long anticipated that higher tariffs on a broad range of imports would be a fixture of U.S. policy in a second Trump term. And that whatever you thought of the goals tariffs were driving towards, their enactment would come at an economic cost along the way. That cost is what helped drive our team’s preference for fixed income over more economically-sensitive equities. But this week’s announcement underscored that we actually underestimated the speed and severity of implementation. Following this week’s reciprocal tariff announcement, tariffs on imports from China are approaching 60 per cent, a level we didn’t anticipate would be reached until 2026. And while we expected a number of product-specific tariffs would be levied, we did not anticipate the broad-based import tariffs announced this week. All totaled, the U.S. effective tariff rate is now around 22 per cent, having started the year at 3 per cent. So what’s next? Our colleagues across Morgan Stanley Research have detailed their expected impacts across equity sectors and asset classes and here are some key takeaways to keep in mind. First, we do think there’s a possibility that negotiation will lower some of these tariffs, particularly for traditional U.S. allies like Japan and Europe, giving some relief to markets and the economic outlook. However, successful negotiation may not arrive quickly, as it's not yet clear what the U.S. would deem sufficient concessions from its trading partners. Lower tariff levels and higher asset purchases might be part of the mix, but we’re still in discovery mode on this. And even if tariff reductions succeed, it's still likely that tariff levels would be meaningfully higher than previously anticipated. So for investors, we think that means there’s more room to go for markets to price in a weaker U.S. growth outlook. In U.S. equities, for example, our strategists argue that first-order impacts of higher tariffs may be mostly priced at this point, but second-order effects – such as knock-on effects of further hits to consumer and corporate confidence – could push the S&P 500 below the 5000 level. In credit markets, weakness has been, and may continue to be, more acute in key sectors where tariff costs are substantial; and may not be able to pass on to price, such as the consumer retail sector. These are companies whose costs are driven by overseas imports. So what happens from here? Are there positive catalysts to watch for? It's going to depend on market valuations. If we get to a point where a recession is more clearly in the price, then U.S. policy catalysts might help the stock market. That could include negotiations that result in smaller tariff increases than those just announced or a fiscal policy response, such as bigger than anticipated tax cuts. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.","duration_ms":211513,"is_playable":true,"release_date":"2025-04-04","external_urls":{"spotify":"https://open.spotify.com/episode/4CDKtwYgup72veuKylW4gv"},"html_description":"

As markets continue reacting to the Trump administration’s tariffs, Michael Zezas, our Global Head of Fixed Income Research and Public Policy Strategy, lists the expected impacts for investors across equity sectors and asset classes.

Read more insights from Morgan Stanley.

---- Transcript -----

Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income Research and Public Policy Strategy. Today we’ll be talking about the market impacts of the recently announced tariff increases.

It’s Friday, April 4th, at 1pm in New York.

This week, as planned, President Trump unveiled tariff increases. These reciprocal tariffs were hiked with the stated goal of reducing the U.S.’s goods trade deficit with other countries. We’ve long anticipated that higher tariffs on a broad range of imports would be a fixture of U.S. policy in a second Trump term. And that whatever you thought of the goals tariffs were driving towards, their enactment would come at an economic cost along the way. That cost is what helped drive our team’s preference for fixed income over more economically-sensitive equities.

But this week’s announcement underscored that we actually underestimated the speed and severity of implementation. Following this week’s reciprocal tariff announcement, tariffs on imports from China are approaching 60 per cent, a level we didn’t anticipate would be reached until 2026. And while we expected a number of product-specific tariffs would be levied, we did not anticipate the broad-based import tariffs announced this week. All totaled, the U.S. effective tariff rate is now around 22 per cent, having started the year at 3 per cent.

So what’s next? Our colleagues across Morgan Stanley Research have detailed their expected impacts across equity sectors and asset classes and here are some key takeaways to keep in mind.

First, we do think there’s a possibility that negotiation will lower some of these tariffs, particularly for traditional U.S. allies like Japan and Europe, giving some relief to markets and the economic outlook.

However, successful negotiation may not arrive quickly, as it's not yet clear what the U.S. would deem sufficient concessions from its trading partners. Lower tariff levels and higher asset purchases might be part of the mix, but we’re still in discovery mode on this. And even if tariff reductions succeed, it's still likely that tariff levels would be meaningfully higher than previously anticipated.

So for investors, we think that means there’s more room to go for markets to price in a weaker U.S. growth outlook. In U.S. equities, for example, our strategists argue that first-order impacts of higher tariffs may be mostly priced at this point, but second-order effects – such as knock-on effects of further hits to consumer and corporate confidence – could push the S&P 500 below the 5000 level.

In credit markets, weakness has been, and may continue to be, more acute in key sectors where tariff costs are substantial; and may not be able to pass on to price, such as the consumer retail sector. These are companies whose costs are driven by overseas imports.

So what happens from here? Are there positive catalysts to watch for?

It's going to depend on market valuations. If we get to a point where a recession is more clearly in the price, then U.S. policy catalysts might help the stock market. That could include negotiations that result in smaller tariff increases than those just announced or a fiscal policy response, such as bigger than anticipated tax cuts.

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/5N8hDxsETIO8GTuzJQPxfE/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"5ZCVhXMKDPi5i9VpmcwDd5","uri":"spotify:episode:5ZCVhXMKDPi5i9VpmcwDd5","href":"https://api.spotify.com/v1/episodes/5ZCVhXMKDPi5i9VpmcwDd5","name":"How Companies Can Navigate New Tariffs","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"Our Thematics and Public Policy analysts Michelle Weaver and Ariana Salvatore discuss the top five strategies for companies to mitigate the effects of U.S. tariffs. Read more insights from Morgan Stanley. ","duration_ms":761495,"is_playable":true,"release_date":"2025-04-03","external_urls":{"spotify":"https://open.spotify.com/episode/5ZCVhXMKDPi5i9VpmcwDd5"},"html_description":"

Our Thematics and Public Policy analysts Michelle Weaver and Ariana Salvatore discuss the top five strategies for companies to mitigate the effects of U.S. tariffs.

Read more insights from Morgan Stanley.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/7KGTW81D8qy79jsjl6yZBu/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"4XbaujqDcMP8RnKtf7cIXS","uri":"spotify:episode:4XbaujqDcMP8RnKtf7cIXS","href":"https://api.spotify.com/v1/episodes/4XbaujqDcMP8RnKtf7cIXS","name":"Faceoff: U.S. vs. European Equities","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"Our analysts Paul Walsh, Mike Wilson and Marina Zavolock debate the relative merits of U.S. and European stocks in this very dynamic market moment.Read more insights from Morgan Stanley. ","duration_ms":620382,"is_playable":true,"release_date":"2025-04-02","external_urls":{"spotify":"https://open.spotify.com/episode/4XbaujqDcMP8RnKtf7cIXS"},"html_description":"

Our analysts Paul Walsh, Mike Wilson and Marina Zavolock debate the relative merits of U.S. and European stocks in this very dynamic market moment.

Read more insights from Morgan Stanley.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/3qOjbkDVbQ4IMYLSgJ4ugu/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"5lKA0GWYwncXVpDMELPijG","uri":"spotify:episode:5lKA0GWYwncXVpDMELPijG","href":"https://api.spotify.com/v1/episodes/5lKA0GWYwncXVpDMELPijG","name":"What’s Weighing on U.S. Consumer Confidence?","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"Our analysts Arunima Sinha, Heather Berger and James Egan discuss the resilience of U.S. consumer spending, credit use and homeownership in light of the Trump administration’s policies.Read more insights from Morgan Stanley. ","duration_ms":577123,"is_playable":true,"release_date":"2025-04-02","external_urls":{"spotify":"https://open.spotify.com/episode/5lKA0GWYwncXVpDMELPijG"},"html_description":"

Our analysts Arunima Sinha, Heather Berger and James Egan discuss the resilience of U.S. consumer spending, credit use and homeownership in light of the Trump administration’s policies.

Read more insights from Morgan Stanley.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/2Jg9jpVHnHQ6e0KkdnQ1fi/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"6he7gi8E309XFaCh3CPZRA","uri":"spotify:episode:6he7gi8E309XFaCh3CPZRA","href":"https://api.spotify.com/v1/episodes/6he7gi8E309XFaCh3CPZRA","name":"Are Any Stocks Immune to Tariffs?","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"Policy questions and growth risks are likely to persist in the aftermath of the Trump administration’s upcoming tariffs. Our CIO and Chief U.S. Equity Strategist Mike Wilson outlines how to seek investments that might mitigate the fallout.Read more insights from Morgan Stanley. ----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast – our views on tariffs and the implications for equity markets. It's Monday, March 31st at 11:30am in New York. So let’s get after it. Over the past few weeks, tariffs have moved front and center for equity investors. While the reciprocal tariff announcement expected on April 2nd should offer some incremental clarity on tariff rates and countries or products in scope, we view it as a maximalist starting point ahead of bilateral negotiations as opposed to a clearing event. This means policy uncertainty and growth risks are likely to persist for at least several more months, even if it marks a short-term low for sentiment and stock prices. In the baseline for April 2nd, our policy strategists see the administration focusing on a continued ramp higher in the tariff rate on China – while product-specific tariffs on Europe, Mexico and Canada could see some de-escalation based on the USMCA signed during Trump’s first term. Additional tariffs on multiple Asia economies and products are also possible. Timing is another consideration. The administration has said it plans to announce some tariffs for implementation on April 2nd, while others are to be implemented later, signaling a path for negotiations. However, this is a low conviction view given the amount of latitude the President has on this issue. We don't think this baseline scenario prevents upside progress at the index level – as an \"off ramp\" for Mexico and Canada would help to counter some of the risk from moderately higher China tariffs. Furthermore, product level tariffs on the EU and certain Asia economies, like Vietnam, are likely to be more impactful on a sector basis. Having said that, the S&P 500 upside is likely capped at 5800-5900 in the near term – even if we get a less onerous than expected announcement. Such an outcome would likely bring no immediate additional increase in the tariff rate on China; more modest or targeted tariffs on EU products than our base case; an extended USMCA exemption for Mexico and Canada; and very narrow tariffs on other Asia economies. No matter what the outcome is on Wednesday, we think new highs for the S&P 500 are out of the question in the first half of the year; unless there is a clear reacceleration in earnings revisions breadth, something we believe is very unlikely until the third or fourth quarter.Conversely, to get a sustained break of the low end of our first half range, we would need to see a more severe April 2nd tariff outcome than our base case and a meaningful deterioration in the hard economic data, especially labor markets. This is perhaps the outcome the market was starting to price on Friday and this morning. Looking at the stock level, companies that can mitigate the risk of tariffs are likely to outperform. Key strategies here include the ability to raise price, currency hedging, redirecting products to markets without tariffs, inventory stockpiling and diversifying supply chains geographically. All these strategies involve trade-offs or costs, but those companies that can do it effectively should see better performance. In short, it’s typically companies with scale and strong negotiating power with its suppliers and customers. This all leads us back to large cap quality as the key factor to focus on when picking stocks. At the sector level, Capital Goods is well positioned given its stronger pricing power; while consumer discretionary goods appears to be in the weakest position. Bottom line, stay up the quality and size curve with a bias toward companies with good mitigation strategies. And see our research for more details. Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.","duration_ms":253309,"is_playable":true,"release_date":"2025-03-31","external_urls":{"spotify":"https://open.spotify.com/episode/6he7gi8E309XFaCh3CPZRA"},"html_description":"

Policy questions and growth risks are likely to persist in the aftermath of the Trump administration’s upcoming tariffs. Our CIO and Chief U.S. Equity Strategist Mike Wilson outlines how to seek investments that might mitigate the fallout.

Read more insights from Morgan Stanley.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast – our views on tariffs and the implications for equity markets.

It's Monday, March 31st at 11:30am in New York.

So let’s get after it.

Over the past few weeks, tariffs have moved front and center for equity investors. While the reciprocal tariff announcement expected on April 2nd should offer some incremental clarity on tariff rates and countries or products in scope, we view it as a maximalist starting point ahead of bilateral negotiations as opposed to a clearing event. This means policy uncertainty and growth risks are likely to persist for at least several more months, even if it marks a short-term low for sentiment and stock prices.

In the baseline for April 2nd, our policy strategists see the administration focusing on a continued ramp higher in the tariff rate on China – while product-specific tariffs on Europe, Mexico and Canada could see some de-escalation based on the USMCA signed during Trump’s first term. Additional tariffs on multiple Asia economies and products are also possible. Timing is another consideration. The administration has said it plans to announce some tariffs for implementation on April 2nd, while others are to be implemented later, signaling a path for negotiations. However, this is a low conviction view given the amount of latitude the President has on this issue.

We don't think this baseline scenario prevents upside progress at the index level – as an "off ramp" for Mexico and Canada would help to counter some of the risk from moderately higher China tariffs. Furthermore, product level tariffs on the EU and certain Asia economies, like Vietnam, are likely to be more impactful on a sector basis.

Having said that, the S&P 500 upside is likely capped at 5800-5900 in the near term – even if we get a less onerous than expected announcement. Such an outcome would likely bring no immediate additional increase in the tariff rate on China; more modest or targeted tariffs on EU products than our base case; an extended USMCA exemption for Mexico and Canada; and very narrow tariffs on other Asia economies.

No matter what the outcome is on Wednesday, we think new highs for the S&P 500 are out of the question in the first half of the year; unless there is a clear reacceleration in earnings revisions breadth, something we believe is very unlikely until the third or fourth quarter.

Conversely, to get a sustained break of the low end of our first half range, we would need to see a more severe April 2nd tariff outcome than our base case and a meaningful deterioration in the hard economic data, especially labor markets. This is perhaps the outcome the market was starting to price on Friday and this morning.

Looking at the stock level, companies that can mitigate the risk of tariffs are likely to outperform. Key strategies here include the ability to raise price, currency hedging, redirecting products to markets without tariffs, inventory stockpiling and diversifying supply chains geographically. All these strategies involve trade-offs or costs, but those companies that can do it effectively should see better performance. In short, it’s typically companies with scale and strong negotiating power with its suppliers and customers. This all leads us back to large cap quality as the key factor to focus on when picking stocks.

At the sector level, Capital Goods is well positioned given its stronger pricing power; while consumer discretionary goods appears to be in the weakest position.

Bottom line, stay up the quality and size curve with a bias toward companies with good mitigation strategies. And see our research for more details.

Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/4k8Or3dc5REYkasrUEnhz2/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"49LljKvq0SdkazHWBQFXs2","uri":"spotify:episode:49LljKvq0SdkazHWBQFXs2","href":"https://api.spotify.com/v1/episodes/49LljKvq0SdkazHWBQFXs2","name":"New Worries in the Credit Markets","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"As credit resilience weakens with a worsening fundamental backdrop, our Head of Corporate Credit Research Andrew Sheets suggests investors reconsider their portfolio quality.Read more insights from Morgan Stanley. ----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today I’m going to talk about why we think near term improvement may be temporary, and thus an opportunity to improve credit quality. It's Friday March 28th at 2pm in London. In volatile markets, it is always hard to parse how much is emotion, and how much is real change. As you would have heard earlier this week from my colleague Mike Wilson, Morgan Stanley’s Chief U.S. Equity Strategist, we see a window for short-term relief in U.S. stock markets, as a number of indicators suggest that markets may have been oversold. But for credit, we think this relief will be temporary. Fundamentals around the medium-term story are on the wrong track, with both growth and inflation moving in the wrong direction. Credit investors should use this respite to improve portfolio quality. Taking a step back, our original thinking entering 2025 was that the future presented a much wider range of economic scenarios, not a great outcome for credit per se, and some real slowing of U.S. growth into 2026, again not a particularly attractive outcome. Yet we also thought it would take time for these risks to arrive. For the economy, it entered 2025 with some pretty decent momentum. We thought it would take time for any changes in policy to both materialize and change the real economic trajectory. Meanwhile, credit had several tailwinds, including attractive yields, strong demand and stable balance sheet metrics. And so we initially thought that credit would remain quite resilient, even if other asset classes showed more volatility. But our conviction in that resilience from credit is weakening as the fundamental backdrop is getting worse. Changes to U.S. policy have been more aggressive, and happened more quickly than we previously expected. And partly as a result, Morgan Stanley's forecasts for growth, inflation and policy rates are all moving in the wrong direction – with forecasts showing now weaker growth, higher inflation and fewer rate cuts from the Federal Reserve than we thought at the start of this year. And it’s not just us. The Federal Reserve's latest Summary of Economic Projections, recently released, show a similar expectation for lower growth and higher inflation relative to the Fed’s prior forecast path. In short, Morgan Stanley’s economic forecasts point to rising odds of a scenario we think is challenging: weaker growth, and yet a central bank that may be hesitant to cut rates to support the economy, given persistent inflation. The rising risks of a scenario of weaker growth, higher inflation and less help from central bank policy temper our enthusiasm to buy the so-called dip – and add exposure given some modest recent weakness. Our U.S. credit strategy team, led by Vishwas Patkar, thinks that U.S. investment grade spreads are only 'fair', given these changing conditions, while spreads for U.S. high yield and U.S. loans should actually now be modestly wider through year-end – given the rising risks. In short, credit investors should try to keep powder dry, resist the urge to buy the dip, and look to improve portfolio quality. Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.","duration_ms":227813,"is_playable":true,"release_date":"2025-03-28","external_urls":{"spotify":"https://open.spotify.com/episode/49LljKvq0SdkazHWBQFXs2"},"html_description":"

As credit resilience weakens with a worsening fundamental backdrop, our Head of Corporate Credit Research Andrew Sheets suggests investors reconsider their portfolio quality.

Read more insights from Morgan Stanley.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today I’m going to talk about why we think near term improvement may be temporary, and thus an opportunity to improve credit quality.

It's Friday March 28th at 2pm in London.

In volatile markets, it is always hard to parse how much is emotion, and how much is real change. As you would have heard earlier this week from my colleague Mike Wilson, Morgan Stanley’s Chief U.S. Equity Strategist, we see a window for short-term relief in U.S. stock markets, as a number of indicators suggest that markets may have been oversold.

But for credit, we think this relief will be temporary. Fundamentals around the medium-term story are on the wrong track, with both growth and inflation moving in the wrong direction. Credit investors should use this respite to improve portfolio quality.

Taking a step back, our original thinking entering 2025 was that the future presented a much wider range of economic scenarios, not a great outcome for credit per se, and some real slowing of U.S. growth into 2026, again not a particularly attractive outcome.

Yet we also thought it would take time for these risks to arrive. For the economy, it entered 2025 with some pretty decent momentum. We thought it would take time for any changes in policy to both materialize and change the real economic trajectory.

Meanwhile, credit had several tailwinds, including attractive yields, strong demand and stable balance sheet metrics. And so we initially thought that credit would remain quite resilient, even if other asset classes showed more volatility.

But our conviction in that resilience from credit is weakening as the fundamental backdrop is getting worse. Changes to U.S. policy have been more aggressive, and happened more quickly than we previously expected. And partly as a result, Morgan Stanley's forecasts for growth, inflation and policy rates are all moving in the wrong direction – with forecasts showing now weaker growth, higher inflation and fewer rate cuts from the Federal Reserve than we thought at the start of this year. And it’s not just us. The Federal Reserve's latest Summary of Economic Projections, recently released, show a similar expectation for lower growth and higher inflation relative to the Fed’s prior forecast path.

In short, Morgan Stanley’s economic forecasts point to rising odds of a scenario we think is challenging: weaker growth, and yet a central bank that may be hesitant to cut rates to support the economy, given persistent inflation.

The rising risks of a scenario of weaker growth, higher inflation and less help from central bank policy temper our enthusiasm to buy the so-called dip – and add exposure given some modest recent weakness. Our U.S. credit strategy team, led by Vishwas Patkar, thinks that U.S. investment grade spreads are only 'fair', given these changing conditions, while spreads for U.S. high yield and U.S. loans should actually now be modestly wider through year-end – given the rising risks.

In short, credit investors should try to keep powder dry, resist the urge to buy the dip, and look to improve portfolio quality.

Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/41ad3Z7ViInIdJpNFfmN7v/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"2twl0XUPWFgCOjDiigipRq","uri":"spotify:episode:2twl0XUPWFgCOjDiigipRq","href":"https://api.spotify.com/v1/episodes/2twl0XUPWFgCOjDiigipRq","name":"New Tariffs, New Patterns of Trade","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"Our global economists Seth Carpenter and Rajeev Sibal discuss how global trade will need to realign in response to escalating U.S. tariff policy.Read more insights from Morgan Stanley. ","duration_ms":548205,"is_playable":true,"release_date":"2025-03-27","external_urls":{"spotify":"https://open.spotify.com/episode/2twl0XUPWFgCOjDiigipRq"},"html_description":"

Our global economists Seth Carpenter and Rajeev Sibal discuss how global trade will need to realign in response to escalating U.S. tariff policy.

Read more insights from Morgan Stanley.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/2Udcm8u71B6VIZ5YrGvVIE/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"4SYiHoJyCpeZpGLFuwiCo1","uri":"spotify:episode:4SYiHoJyCpeZpGLFuwiCo1","href":"https://api.spotify.com/v1/episodes/4SYiHoJyCpeZpGLFuwiCo1","name":"Is the Future of Food Fermented?","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"Our European Sustainability Strategists Rachel Fletcher and Arushi Agarwal discuss how fermentation presents a new opportunity to tap into the alternative proteins market, offering a solution to mounting food supply challenges.Read more insights from Morgan Stanley. ----- Transcript -----Rachel Fletcher: Welcome to Thoughts on the Market. I'm Rachel Fletcher Morgan Stanley's, Head of EMEA Sustainability Research.Arushi Agarwal: And I'm Arushi Agarwal European Sustainability Strategist, based in London.Rachel Fletcher: From kombucha to kimchi, probiotic rich fermented foods have long been staples at health-focused grocers. On the show today, a deeper dive into the future of fermentation technology. Does it hold the key to meeting the world's growing nutrition needs as people live longer, healthier lives?It's Wednesday, 26th of March, at 3 pm in London.Many of you listening may remember hearing about longevity. It's one of our four long-term secular themes that we're following closely at Morgan Stanley; and this year we are looking even more closely at a sub-theme – affordable, healthy nutrition. Arushi, in your recent report, you highlight that traditional agriculture is facing many significant challenges. What are they and how urgent is this situation?Arushi Agarwal: There are four key environmental and social issues that we highlight in the note. Now, the first two, which are related to emissions intensity and resource consumption are quite well known. So traditional agriculture is responsible for almost a third of global greenhouse gas emissions, and it also uses more than 50 percent of the world's land and freshwater resources. What we believe are issues that are less focused on – are related to current agricultural practices and climate change that could affect our ability to serve the rising demand for nutrition.We highlight some studies in the note. One of them states that the produce that we have today has on average 40 percent less nutrition than it did over 80 years ago; and this is due to elevated use of chemicals and decline in soil fertility. Another study that we refer to estimates that average yields could decline by 30 to 50 percent before the end of the century, and this is even in the slowest of the warming scenarios.Rachel Fletcher: I think everyone would agree that there are four very serious issues. Are there potential solutions to these challenges?Arushi Agarwal: Yes, so when we've written about the future of food previously, we've identified alternative proteins, precision agriculture, and seeds technology as possible solutions for improving food security and reducing emissions.If I focus on alternative proteins, this category has so far been dominated by plant-based food, which has seen a moderation in growth due to challenges related to taste and price. However, we still see significant need for alternative proteins, and synthetic biology-led fermentation is a new way to tap into this market.In simple terms, this technology involves growing large amounts of microorganisms in tanks, which can then be harvested and used as a source of protein or other nutrients. We believe this technology can support healthy longevity, provide access to reliable and affordable food, and also fill many of the nutritional gaps that are related to plant-based food.Rachel Fletcher: So how big is the fermentation market and why are we focusing on it right now?Arushi Agarwal: So, we estimate a base case of $30 billion by 2030. This represents a 5,000-kiloton market for fermented proteins. We think the market will develop in two phases. Phase one from 2025 to 2027 will be focused on whey protein and animal nutrition. We are already seeing a few players sell products at competitive prices in these markets. Moving on to phase two from 2028 to 2030, we expect the market will expand to the egg, meat and daily replacement industry.There are a few reasons we think investors should start paying attention now. 2024 was a pivotal year in validating the technology's proof of concept. A lot of companies moved from labs to pilot state. They achieved regulatory approvals to sell their products in markets like U.S. and Singapore, and they also conducted extensive market testing. As this technology scales, we believe the next three years will be critical for commercialization.Rachel Fletcher: So, there's potentially significant growth there, but what's the capital investment needed for this scaling effort?Arushi Agarwal: A lot of CapEx will be required. Scaling of this technology will require large initial CapEx, predominantly in setting up bioreactors or fermentation tanks. Achieving our 2030 base case stamp will require 200 million liters in bioreactor capacity. This equals to an initial investment opportunity of a hundred billion dollars. But once these facilities are all set up, ongoing expenses will focus on input costs for carbon, oxygen, water, nitrogen, and electricity. PWC estimates that 40 to 60 percent of the ongoing costs with this process are associated with electricity, which makes it a key consideration for future commercial investments.Rachel Fletcher: Now we've talked a lot about the potential opportunity and the potential total addressable market, but what about consumer preferences? Do you think they'll be easy to shift?Arushi Agarwal: So, we are already seeing evidence of shifting consumer trends, which we think can be supportive of demand for fermented proteins. An analysis of Google Trends, data shows that since 2019, interest in terms like high protein diet and gut health has increased the most. Some of the products we looked at within the fermentation space not only contain fiber as expected, but they also offer a high degree of protein concentration, a lot of times ranging from 60 to 90 percent.Additionally, food manufacturers are focusing on new format foods that provide more than one use case. For example, free from all types of allergens. Fermentation technology utilizes a very diverse range of microbial species and can provide solutions related to non-allergenic foods.Rachel Fletcher: We've covered a lot today, but I do want to ask a final question around policy support. What's the government's role in developing the alternative proteins market, and what's your outlook around policy in Europe, the U.S., and other key regions, for example?Arushi Agarwal: This is an important question. Growth of fermentation technology hinges on adequate policy support; not just to enable the technology, but also to drive demand for its products. So, in the note, we highlight various instances of ongoing policy support from across the globe. For example, regulatory approvals in the U.S., a cellular agriculture package in Netherlands, plant-based food fund in Denmark, Singapore's 30 by 30 strategy.We believe these will all be critical in boosting the supply side of fermented products. We also mentioned Denmark's upcoming legislation on carbon tax related to agriculture emissions. We believe this could provide an indirect catalyst for demand for fermented goods. Now, whilst these initiatives support the direction of travel for this technology, it's important to acknowledge that more policy support will be needed to create a level playing field versus traditional agriculture, which as we know currently benefits from various subsidies.Rachel Fletcher: Arushi, this has been really interesting. Thanks so much for taking the time to talk.Arushi Agarwal: Thank you, Rachel. It was great speaking with you,Rachel Fletcher: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.","duration_ms":453773,"is_playable":true,"release_date":"2025-03-26","external_urls":{"spotify":"https://open.spotify.com/episode/4SYiHoJyCpeZpGLFuwiCo1"},"html_description":"

Our European Sustainability Strategists Rachel Fletcher and Arushi Agarwal discuss how fermentation presents a new opportunity to tap into the alternative proteins market, offering a solution to mounting food supply challenges.

Read more insights from Morgan Stanley.

----- Transcript -----

Rachel Fletcher: Welcome to Thoughts on the Market. I'm Rachel Fletcher Morgan Stanley's, Head of EMEA Sustainability Research.

Arushi Agarwal: And I'm Arushi Agarwal European Sustainability Strategist, based in London.

Rachel Fletcher: From kombucha to kimchi, probiotic rich fermented foods have long been staples at health-focused grocers. On the show today, a deeper dive into the future of fermentation technology. Does it hold the key to meeting the world's growing nutrition needs as people live longer, healthier lives?

It's Wednesday, 26th of March, at 3 pm in London.

Many of you listening may remember hearing about longevity. It's one of our four long-term secular themes that we're following closely at Morgan Stanley; and this year we are looking even more closely at a sub-theme – affordable, healthy nutrition. Arushi, in your recent report, you highlight that traditional agriculture is facing many significant challenges. What are they and how urgent is this situation?

Arushi Agarwal: There are four key environmental and social issues that we highlight in the note. Now, the first two, which are related to emissions intensity and resource consumption are quite well known. So traditional agriculture is responsible for almost a third of global greenhouse gas emissions, and it also uses more than 50 percent of the world's land and freshwater resources. What we believe are issues that are less focused on – are related to current agricultural practices and climate change that could affect our ability to serve the rising demand for nutrition.

We highlight some studies in the note. One of them states that the produce that we have today has on average 40 percent less nutrition than it did over 80 years ago; and this is due to elevated use of chemicals and decline in soil fertility. Another study that we refer to estimates that average yields could decline by 30 to 50 percent before the end of the century, and this is even in the slowest of the warming scenarios.

Rachel Fletcher: I think everyone would agree that there are four very serious issues. Are there potential solutions to these challenges?

Arushi Agarwal: Yes, so when we've written about the future of food previously, we've identified alternative proteins, precision agriculture, and seeds technology as possible solutions for improving food security and reducing emissions.

If I focus on alternative proteins, this category has so far been dominated by plant-based food, which has seen a moderation in growth due to challenges related to taste and price. However, we still see significant need for alternative proteins, and synthetic biology-led fermentation is a new way to tap into this market.

In simple terms, this technology involves growing large amounts of microorganisms in tanks, which can then be harvested and used as a source of protein or other nutrients. We believe this technology can support healthy longevity, provide access to reliable and affordable food, and also fill many of the nutritional gaps that are related to plant-based food.

Rachel Fletcher: So how big is the fermentation market and why are we focusing on it right now?

Arushi Agarwal: So, we estimate a base case of $30 billion by 2030. This represents a 5,000-kiloton market for fermented proteins. We think the market will develop in two phases. Phase one from 2025 to 2027 will be focused on whey protein and animal nutrition. We are already seeing a few players sell products at competitive prices in these markets. Moving on to phase two from 2028 to 2030, we expect the market will expand to the egg, meat and daily replacement industry.

There are a few reasons we think investors should start paying attention now. 2024 was a pivotal year in validating the technology's proof of concept. A lot of companies moved from labs to pilot state. They achieved regulatory approvals to sell their products in markets like U.S. and Singapore, and they also conducted extensive market testing. As this technology scales, we believe the next three years will be critical for commercialization.

Rachel Fletcher: So, there's potentially significant growth there, but what's the capital investment needed for this scaling effort?

Arushi Agarwal: A lot of CapEx will be required. Scaling of this technology will require large initial CapEx, predominantly in setting up bioreactors or fermentation tanks. Achieving our 2030 base case stamp will require 200 million liters in bioreactor capacity. This equals to an initial investment opportunity of a hundred billion dollars. But once these facilities are all set up, ongoing expenses will focus on input costs for carbon, oxygen, water, nitrogen, and electricity. PWC estimates that 40 to 60 percent of the ongoing costs with this process are associated with electricity, which makes it a key consideration for future commercial investments.

Rachel Fletcher: Now we've talked a lot about the potential opportunity and the potential total addressable market, but what about consumer preferences? Do you think they'll be easy to shift?

Arushi Agarwal: So, we are already seeing evidence of shifting consumer trends, which we think can be supportive of demand for fermented proteins. An analysis of Google Trends, data shows that since 2019, interest in terms like high protein diet and gut health has increased the most. Some of the products we looked at within the fermentation space not only contain fiber as expected, but they also offer a high degree of protein concentration, a lot of times ranging from 60 to 90 percent.

Additionally, food manufacturers are focusing on new format foods that provide more than one use case. For example, free from all types of allergens. Fermentation technology utilizes a very diverse range of microbial species and can provide solutions related to non-allergenic foods.

Rachel Fletcher: We've covered a lot today, but I do want to ask a final question around policy support. What's the government's role in developing the alternative proteins market, and what's your outlook around policy in Europe, the U.S., and other key regions, for example?

Arushi Agarwal: This is an important question. Growth of fermentation technology hinges on adequate policy support; not just to enable the technology, but also to drive demand for its products. So, in the note, we highlight various instances of ongoing policy support from across the globe. For example, regulatory approvals in the U.S., a cellular agriculture package in Netherlands, plant-based food fund in Denmark, Singapore's 30 by 30 strategy.

We believe these will all be critical in boosting the supply side of fermented products. We also mentioned Denmark's upcoming legislation on carbon tax related to agriculture emissions. We believe this could provide an indirect catalyst for demand for fermented goods. Now, whilst these initiatives support the direction of travel for this technology, it's important to acknowledge that more policy support will be needed to create a level playing field versus traditional agriculture, which as we know currently benefits from various subsidies.

Rachel Fletcher: Arushi, this has been really interesting. Thanks so much for taking the time to talk.

Arushi Agarwal: Thank you, Rachel. It was great speaking with you,

Rachel Fletcher: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/2BI5fsmD3zpChrGNWg6Bhj/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"3DFfTF1smlNmFkLIJ009hL","uri":"spotify:episode:3DFfTF1smlNmFkLIJ009hL","href":"https://api.spotify.com/v1/episodes/3DFfTF1smlNmFkLIJ009hL","name":"European Banks Spark Rising Investor Interest","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"Our European Heads of Diversified Financials and Banks Research Bruce Hamilton and Alvaro Serrano discuss the biggest themes and debates from the recent Morgan Stanley European Financials Conference.Read more insights from Morgan Stanley. ----- Transcript -----Bruce Hamilton: Welcome to Thoughts on the Market. I'm Bruce Hamilton, Head of European Diversified Financials.Alvaro Serrano: And I'm Alvaro Serrano, Head of European Banks.Bruce Hamilton: Today we'll discuss our key takeaways from Morgan Stanley's 21st European Financials Conference last week.It's Tuesday, March 25th, 3pm, here in London.We were both at the conference here in London where we had more than 550 registered clients and roughly a hundred corporates in attendance. Alvaro, once again, you were the conference chair, and I wondered if you could first talk about the title of the conference this year – Europe's moment. What inspired this and was it a clear theme at the conference?Alvaro Serrano: European banks are probably one of the strongest performing sectors globally. That has been on the back of expectations and prospects of a Ukraine peace deal, expectations of high defense spending, and we were going to German elections. I think it's fair to say that post German elections, Germany has delivered above expectations on the fiscal package. And the announcement was a big boost, at a time where U.S. growth is starting to be questioned. I think it's turning the investment flows into Europe. It's Europe's moment to shine, and hence the title.Bruce Hamilton: And what were some of the other sort of key themes and debates that emerge from company presentations and panels at the conference?Alvaro Serrano: The German fiscal/financial package definitely dominated the debate. But it was how it fed through the PNL that was the more tangible discussion. First of all, on NII – Net Interest Income – definitely more optimism among banks. The yield curve has steepened more than 50 basis points since the announcement together with increased prospects of loan growth. Accelerated loan growth is definitely improving the confidence from management teams on the median term growth outlook. I think that was the biggest takeaway for me.Bruce Hamilton: Got it. And our North American colleagues have been tracking the risks and opportunities for U.S. financials under the Trump administration. How, if at all, are European financials better positioned than their U.S. counterparts?Alvaro Serrano: Ultimately deregulation has been a big theme in the U.S. from the new administration. We've seen tangible sort of measures like the delay in implementation of Basel endgame; and some steps in around consumer legislation – so that we haven't seen [in] Europe.We had events from the supervisory arm of the ECB. And I think the overall message is that there's unlikely to be deregulation on the capital front.What grabbed a lot of the headlines, a lot of the debate was the proposal from the European Commission on Capital Markets Union now rebranded Savings and Investment Union. There's been measures and proposals around savings products, around a reform of the securitization market, which have pretty positive implications. Medium term, it should increase the velocity of the bank's balance sheets, and ultimately the profitability. So, more optimistic on the medium-term outlook.Bruce, I wanted to turn it over to you. The capital markets recovery cycle was a very big topic of discussion, especially given the rising investor concerns lately. What did you learn at the conference?Bruce Hamilton: So, yeah, you're right. I mean, obviously the capital markets cycle is pretty key for the performance of the diversified financial sector – as was clear from investor polling. I would say the messages from the companies were mixed. On the one hand, the more transactional driven models – so, some of the exchanges that the investment platforms – were relatively upbeat, across asset classes. Volume, momentum has been strong through the first quarter of this year. And so that was encouraging.And looking further out – the confidence around some of these secular growth drivers, across the business model. So, data growth, software solutions growth, post-trade opportunities, expanding fixed income offerings were all clear from the exchanges.On the other hand, the business models that are more geared to sort of deal activity, to M&A – sort of private market firms. Clearly there, the messaging was more mixed, given the slower start to the year in the light of tariff uncertainty, which has driven a widening in bid our spread. So certainly there, the messaging was a little bit more downbeat. Though in the context of a still-improving sort of multi-year recovery cycle anticipated in capital markets. So, a pause rather than a cancellation of that improvement.Alvaro Serrano: And what about private markets? Especially in light of the sluggish capital markets activity since the start of the year?Bruce Hamilton: Well encouragingly, I think, you know, investors still had private markets, the private market sub-sector, as the most popular of the diverse vote financial sub-sectors. Which I think you could take to read as meaning that the pullback in shares has already captured some of the concerns around a slower start to the year in terms of capital markets activity.The view of most investors remains that some of the longer-term growth drivers, including increasing allocations from wealth, remain pretty supportive for the longer-term structural growth in the sector. So, I think, some clearly worry that a worsening in credit conditions could still cause share price moves down. But I think generally, we still feel the longer term looks pretty encouraging.Finally, Alvaro, any significant updates on the use of AI within the financial sector?Alvaro Serrano: It definitely came up pretty much in every session because ultimately AI and broader digitization efforts in mass market models like the banks are – is a key tool to improve efficiency. It came up as a key lever to improve user experience and at the same time improve cost efficiency. And when it comes to underwriting loans, it's also a very important tool, although asset quality's not a key theme at the moment.It’s a race to embrace, I would say, because it's a key competitive advantage. And if you're not, you fall behind.Bruce Hamilton: Great Alvaro. Thanks for taking the time to talk.Alvaro Serrano: Great speaking with you, Bruce.Bruce Hamilton: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.","duration_ms":395598,"is_playable":true,"release_date":"2025-03-25","external_urls":{"spotify":"https://open.spotify.com/episode/3DFfTF1smlNmFkLIJ009hL"},"html_description":"

Our European Heads of Diversified Financials and Banks Research Bruce Hamilton and Alvaro Serrano discuss the biggest themes and debates from the recent Morgan Stanley European Financials Conference.

Read more insights from Morgan Stanley.

----- Transcript -----

Bruce Hamilton: Welcome to Thoughts on the Market. I'm Bruce Hamilton, Head of European Diversified Financials.

Alvaro Serrano: And I'm Alvaro Serrano, Head of European Banks.

Bruce Hamilton: Today we'll discuss our key takeaways from Morgan Stanley's 21st European Financials Conference last week.

It's Tuesday, March 25th, 3pm, here in London.

We were both at the conference here in London where we had more than 550 registered clients and roughly a hundred corporates in attendance. Alvaro, once again, you were the conference chair, and I wondered if you could first talk about the title of the conference this year – Europe's moment. What inspired this and was it a clear theme at the conference?

Alvaro Serrano: European banks are probably one of the strongest performing sectors globally. That has been on the back of expectations and prospects of a Ukraine peace deal, expectations of high defense spending, and we were going to German elections. I think it's fair to say that post German elections, Germany has delivered above expectations on the fiscal package. And the announcement was a big boost, at a time where U.S. growth is starting to be questioned. I think it's turning the investment flows into Europe. It's Europe's moment to shine, and hence the title.

Bruce Hamilton: And what were some of the other sort of key themes and debates that emerge from company presentations and panels at the conference?

Alvaro Serrano: The German fiscal/financial package definitely dominated the debate. But it was how it fed through the PNL that was the more tangible discussion. First of all, on NII – Net Interest Income – definitely more optimism among banks. The yield curve has steepened more than 50 basis points since the announcement together with increased prospects of loan growth. Accelerated loan growth is definitely improving the confidence from management teams on the median term growth outlook. I think that was the biggest takeaway for me.

Bruce Hamilton: Got it. And our North American colleagues have been tracking the risks and opportunities for U.S. financials under the Trump administration. How, if at all, are European financials better positioned than their U.S. counterparts?

Alvaro Serrano: Ultimately deregulation has been a big theme in the U.S. from the new administration. We've seen tangible sort of measures like the delay in implementation of Basel endgame; and some steps in around consumer legislation – so that we haven't seen [in] Europe.

We had events from the supervisory arm of the ECB. And I think the overall message is that there's unlikely to be deregulation on the capital front.

What grabbed a lot of the headlines, a lot of the debate was the proposal from the European Commission on Capital Markets Union now rebranded Savings and Investment Union. There's been measures and proposals around savings products, around a reform of the securitization market, which have pretty positive implications. Medium term, it should increase the velocity of the bank's balance sheets, and ultimately the profitability. So, more optimistic on the medium-term outlook.

Bruce, I wanted to turn it over to you. The capital markets recovery cycle was a very big topic of discussion, especially given the rising investor concerns lately. What did you learn at the conference?

Bruce Hamilton: So, yeah, you're right. I mean, obviously the capital markets cycle is pretty key for the performance of the diversified financial sector – as was clear from investor polling. I would say the messages from the companies were mixed. On the one hand, the more transactional driven models – so, some of the exchanges that the investment platforms – were relatively upbeat, across asset classes. Volume, momentum has been strong through the first quarter of this year. And so that was encouraging.

And looking further out – the confidence around some of these secular growth drivers, across the business model. So, data growth, software solutions growth, post-trade opportunities, expanding fixed income offerings were all clear from the exchanges.

On the other hand, the business models that are more geared to sort of deal activity, to M&A – sort of private market firms. Clearly there, the messaging was more mixed, given the slower start to the year in the light of tariff uncertainty, which has driven a widening in bid our spread. So certainly there, the messaging was a little bit more downbeat. Though in the context of a still-improving sort of multi-year recovery cycle anticipated in capital markets. So, a pause rather than a cancellation of that improvement.

Alvaro Serrano: And what about private markets? Especially in light of the sluggish capital markets activity since the start of the year?

Bruce Hamilton: Well encouragingly, I think, you know, investors still had private markets, the private market sub-sector, as the most popular of the diverse vote financial sub-sectors. Which I think you could take to read as meaning that the pullback in shares has already captured some of the concerns around a slower start to the year in terms of capital markets activity.

The view of most investors remains that some of the longer-term growth drivers, including increasing allocations from wealth, remain pretty supportive for the longer-term structural growth in the sector. So, I think, some clearly worry that a worsening in credit conditions could still cause share price moves down. But I think generally, we still feel the longer term looks pretty encouraging.

Finally, Alvaro, any significant updates on the use of AI within the financial sector?

Alvaro Serrano: It definitely came up pretty much in every session because ultimately AI and broader digitization efforts in mass market models like the banks are – is a key tool to improve efficiency. It came up as a key lever to improve user experience and at the same time improve cost efficiency. And when it comes to underwriting loans, it's also a very important tool, although asset quality's not a key theme at the moment.

It’s a race to embrace, I would say, because it's a key competitive advantage. And if you're not, you fall behind.

Bruce Hamilton: Great Alvaro. Thanks for taking the time to talk.

Alvaro Serrano: Great speaking with you, Bruce.

Bruce Hamilton: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/7m3BtpnBKt5JToXVA8GkGp/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"5ZvfMNHfdu9kXA4fPtr6oX","uri":"spotify:episode:5ZvfMNHfdu9kXA4fPtr6oX","href":"https://api.spotify.com/v1/episodes/5ZvfMNHfdu9kXA4fPtr6oX","name":"Key Indicators of How Far Markets Could Rebound","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"Our CIO and Chief U.S. equity strategist Mike Wilson discusses investors’ outlook following last week’s Fed meeting, and lists the key signals to gauge whether stocks can fully rebound from the recent correction. Read more insights from Morgan Stanley. ----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast I’ll be discussing the recent rally in stocks and why it can continue. It's Monday, March 24th at 11:30am in New York. So let’s get after it. Last week's Fed meeting appeared to come as a relief to many market participants as Chair Powell seemed to downplay concerns about inflation, offering a bit more emphasis on the growth side of the Fed’s mandate. The Fed also made the decision to slow the pace of balance sheet runoff, a development that came sooner than some expected and indicated the Fed is ready to act, if necessary. Looking ahead, investors are now very focused on the April 2nd reciprocal tariff deadline. While this catalyst could offer some incremental clarity on tariff rates and countries and products in scope, we think it's more a starting point for tariff negotiations – as opposed to a clearing event. In short, a Fed put seems closer to being in the money than a Trump put though it probably would require material labor weakness or choppier credit and funding markets. So far, DOGE firings have had little impact on data like jobless claims or the overall unemployment rate. There may also be a lag between when employees are laid off and when these individuals show up as unemployed, given that severance is offered to most. The more important question for labor markets is whether the recent decline in the stock market, fall in confidence and rise in economic trade uncertainty will lead to layoffs in the private economy. Our economists' base case assumes that these factors won't drive an unemployment cycle this year; but payrolls, claims, and the unemployment rate will be critical to monitor to inform that view going forward. As usual, looking at the S&P 500 alone does not fully describe the magnitude of the correction in equities. As I noted last week, equity markets got as oversold in this correction as they were during the bear market of 2022. One could ask: Is this the bottom or the beginning of something more severe? In our experience, it’s rare for volatility to end when price momentum is at its lows. However, you can get strong rallies from these conditions which is why we expected one to begin when the S&P 500 reached the bottom end of our first half trading range of 5500 on March 13th. Since then, stocks have rallied with lower quality, higher beta equities leading the bounce, so far. We believe that can continue in the near-term even though we are still advocating higher quality stocks in one's core portfolio for the intermediate term – given weakness in earnings revisions since last November. More specifically, earnings revisions have remained in negative territory for the major U.S. averages all year and have not yet showed signs of bottoming. However, we are starting to see some interesting shifts in revisions trends under the surface. The most notable change here is that the Magnificent 7 earnings revisions look to be stabilizing after a steep decline. This could halt the underperformance of these mega cap stocks in the near term as we head into earnings season and this would help stabilize the S&P 500, in line with our call from two weeks ago. It could also help to attract flows back into the U.S. In our view, one of the reasons why we've seen capital rotate to international markets is that the high-quality leadership cohort of the U.S. equity market began to underperform. So, if this group regains relative strength we could see a rotation back to the U.S. Finally, the weaker U.S. dollar could also reverse the relative earnings revisions downtrend between U.S. and European companies. If you remember, at the end of last year, the U.S. dollar was very strong and provided a headwind to U.S. relative revisions when companies reported fourth quarter results, as we previewed. This may be going the other way for first quarter results season and drive money back to the U.S., at least temporarily. Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.","duration_ms":262243,"is_playable":true,"release_date":"2025-03-24","external_urls":{"spotify":"https://open.spotify.com/episode/5ZvfMNHfdu9kXA4fPtr6oX"},"html_description":"

Our CIO and Chief U.S. equity strategist Mike Wilson discusses investors’ outlook following last week’s Fed meeting, and lists the key signals to gauge whether stocks can fully rebound from the recent correction.

Read more insights from Morgan Stanley.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast I’ll be discussing the recent rally in stocks and why it can continue.

It's Monday, March 24th at 11:30am in New York.

So let’s get after it.

Last week's Fed meeting appeared to come as a relief to many market participants as Chair Powell seemed to downplay concerns about inflation, offering a bit more emphasis on the growth side of the Fed’s mandate. The Fed also made the decision to slow the pace of balance sheet runoff, a development that came sooner than some expected and indicated the Fed is ready to act, if necessary. Looking ahead, investors are now very focused on the April 2nd reciprocal tariff deadline. While this catalyst could offer some incremental clarity on tariff rates and countries and products in scope, we think it's more a starting point for tariff negotiations – as opposed to a clearing event. In short, a Fed put seems closer to being in the money than a Trump put though it probably would require material labor weakness or choppier credit and funding markets.

So far, DOGE firings have had little impact on data like jobless claims or the overall unemployment rate. There may also be a lag between when employees are laid off and when these individuals show up as unemployed, given that severance is offered to most. The more important question for labor markets is whether the recent decline in the stock market, fall in confidence and rise in economic trade uncertainty will lead to layoffs in the private economy. Our economists' base case assumes that these factors won't drive an unemployment cycle this year; but payrolls, claims, and the unemployment rate will be critical to monitor to inform that view going forward.

As usual, looking at the S&P 500 alone does not fully describe the magnitude of the correction in equities. As I noted last week, equity markets got as oversold in this correction as they were during the bear market of 2022. One could ask: Is this the bottom or the beginning of something more severe? In our experience, it’s rare for volatility to end when price momentum is at its lows. However, you can get strong rallies from these conditions which is why we expected one to begin when the S&P 500 reached the bottom end of our first half trading range of 5500 on March 13th. Since then, stocks have rallied with lower quality, higher beta equities leading the bounce, so far. We believe that can continue in the near-term even though we are still advocating higher quality stocks in one's core portfolio for the intermediate term – given weakness in earnings revisions since last November.

More specifically, earnings revisions have remained in negative territory for the major U.S. averages all year and have not yet showed signs of bottoming. However, we are starting to see some interesting shifts in revisions trends under the surface. The most notable change here is that the Magnificent 7 earnings revisions look to be stabilizing after a steep decline. This could halt the underperformance of these mega cap stocks in the near term as we head into earnings season and this would help stabilize the S&P 500, in line with our call from two weeks ago.

It could also help to attract flows back into the U.S. In our view, one of the reasons why we've seen capital rotate to international markets is that the high-quality leadership cohort of the U.S. equity market began to underperform. So, if this group regains relative strength we could see a rotation back to the U.S.

Finally, the weaker U.S. dollar could also reverse the relative earnings revisions downtrend between U.S. and European companies. If you remember, at the end of last year, the U.S. dollar was very strong and provided a headwind to U.S. relative revisions when companies reported fourth quarter results, as we previewed. This may be going the other way for first quarter results season and drive money back to the U.S., at least temporarily.

Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/34eZIYcWeKSdvAMKRyTLWZ/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"4Af7qcV3ANLaX8TmkcyQXk","uri":"spotify:episode:4Af7qcV3ANLaX8TmkcyQXk","href":"https://api.spotify.com/v1/episodes/4Af7qcV3ANLaX8TmkcyQXk","name":"Investors Look Beyond U.S. for Opportunities","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"Amid lower growth and inflation concerns in the US, investors have begun scouring international markets for other opportunities. Our analysts Andrew Sheets, Neville Mandimika and Anlin Zhang dig into one potential outperforming category. Read more insights from Morgan Stanley. ","duration_ms":554997,"is_playable":true,"release_date":"2025-03-21","external_urls":{"spotify":"https://open.spotify.com/episode/4Af7qcV3ANLaX8TmkcyQXk"},"html_description":"

Amid lower growth and inflation concerns in the US, investors have begun scouring international markets for other opportunities. Our analysts Andrew Sheets, Neville Mandimika and Anlin Zhang dig into one potential outperforming category.

Read more insights from Morgan Stanley.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/6yiQVLMi9nheXKWq1gYRFy/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"4oTeYN0XkFqauWiEpLL43W","uri":"spotify:episode:4oTeYN0XkFqauWiEpLL43W","href":"https://api.spotify.com/v1/episodes/4oTeYN0XkFqauWiEpLL43W","name":"Risks and Uncertainty in the Fed’s New Outlook","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"Our Global Head of Macro Strategy Matthew Hornbach and Chief U.S. Economist Michael Gapen discuss the outcome of the recent FOMC meeting, and the outlook for interest rates in 2025 and 2026.Read more insights from Morgan Stanley. ----- Transcript -----Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy.Michael Gapen: And I'm Michael Gapen, Morgan Stanley's Chief U.S. Economist.Matthew Hornbach: Today we're talking about the March Federal Open Market Committee meeting and the path for rates from here.It's Thursday, March 20th at 10am in New York.Mike, the Fed released a new set of projections yesterday. What do these say and what did you learn from them?Michael Gapen: Yeah, Matt, well, the Fed's forecast actually now look a lot like our outlook for the U.S. economy. So, they revised down their expectation of growth. They revised up their expectation for inflation. So, it has a bit of a stagflation, slower growth, stickier inflation outlook – which is very much what we were thinking coming into this year. The Fed also, though, highlighted high policy uncertainty. They wrote down a forecast, but I'm not all that convinced that they have a lot of confidence in how things will evolve.So, I think for me, really, the bigger story were their updated perceptions about uncertainty and risks to the outlook. So, in December, if you remember, they told us; virtually everybody on the committee said, uncertainty around inflation is high and risk to inflation to the upside. They complemented that this week with the fact that uncertainty around growth in the labor market is high, but risk to growth is to the downside, the unemployment rate to the upside. So, you have kind of competing risks here around the Fed's dual mandate. They've got upside risk to inflation, downside risk to growth.To me, that's kind of the really important message. It's hard to have a confidence in a forecast right now, but I think that risk assessment is really interesting.Matthew Hornbach: And with that in mind, and given all the policy uncertainty that the Fed mentioned, what did Powell say about how the Fed should react? In other words, what is appropriate policy at this stage?Michael Gapen: Right. Yeah, it's tricky, right? So, on one side of your mandate, you think risks to inflation are squarely to the upside and growth in labor markets to the downside. So, what do you do? And I think Powell said, I think that the logical answer, which is, well, right now you do nothing, and you wait.But then I think what Powell said is: How we think this plays out is – tariffs may boost inflation in the short run. Which we're going to try to ignore. And if the economy does weaken and the labor market softens, we'll ease policy in order to support activity, right? So, there might be, say, symmetric risks around their dual mandate, but there's asymmetry in the policy outlook.He said we're either going to be on hold or we're going to be cutting rates. And generally, I think that's the right thing.Matthew Hornbach: So, Mike, what I heard from you was that the Fed was going to look through inflation in the near term, and then eventually cut. I mean, do you think they can do that?Michael Gapen: Yeah, I think, Matt, that's a great question. My answer to that is, I think it's easier said than done. We agree that the next move from the Fed is going to be a cut, but we think that cut comes much later.This is a very data dependent Fed. So, I think in the moment, if tariffs boost inflation now and weaken activity later, it's easy to say, ‘I'm going to look through that and cut.’ But in practice, I think it's hard.So, Matt, actually, at this point, though, I think I would actually kind of ask you the same question, but in a different way, right? We doubt the Fed may be able to do this. But the market priced in more rate cuts this year than we think is likely. How would you explain the market pricing and how far away from my expectation do you think it could run?Matthew Hornbach: What’s really interesting about how the market has priced the recent events is – it’s actually pricing more in line with the spirt of your view. In the sense that the market has priced more rate cuts in 2026 than it’s pricing in 2025. So, in spirit, the market is very much with you. But as we like to say, the market price is an average of all possible outcomes. And if one of the outcomes is the Fed does nothing for the foreseeable future. And the other outcome is the Fed cuts aggressively this year. Then the market price has to reflect some degree of additional easing in 2025 that wouldn't necessarily be aligned with a rational baseline for Fed policy.So, market in some ways is reflecting the idea that you're proposing in your forecast. But it's also reflecting the idea that it's a market and that it has to be priced for some amount of risk premia that the Fed is ultimately forced to cut rates more.And in fact, if I can ask you a question relating to that, Mike, you know, the equity market at one point last week had fallen about 10 per cent from the highs.Michael Gapen: Mm hmm.Matthew Hornbach: Number one, is there a percentage drawdown that gets the Fed’s attention? You know, how does the Fed think about the equity market in an environment like this?Michael Gapen: Yeah, I think the equity market, in my view, and I think the view of the Fed, is what I'll call a key spillover channel. Trade and manufacturing are relatively small shares of the economy. So, if we pursue restrictive trade policies, growth should slow, inflation may be firm. That's the Fed's essential baseline; it's ours. The risk here though is that somewhere in there you get a destabilizing period, equity markets fall, upper income consumers take a step back, and you have a much broader downturn at that point.So, you ask a great question, how far do equity markets have to fall? Well, we get 10 per cent declines in equity markets on average about once a year, so it's not that. And the theory would say households have to view that decline in wealth as permanent, right? So, it has to be a fairly substantial decline.Given how far wealth has risen, we're over [$]51 trillion now and an increase in net wealth since COVID. I think that decline has to be large. I would pencil in something, probably need about a 30 per cent decline in equity markets – before maybe that spillover risk gets very elevated.So, Matt, if I can turn back, because, you know, I think we're in general agreement here on what we heard yesterday. But what I'd like to do in terms of looking forward, so aside from the usual communications coming from the Fed, after the blackout period, following the meeting. What do you think investors will be focusing on over the next month?Matthew Hornbach: My sense is that there is already an unusual amount of focus on April 2nd.You know, that is the day when the Trump administration is supposed to unveil their plan for reciprocal tariffs. It's unclear what tariffs will be implemented on April 2nd; what tariffs will be saved for a negotiating process thereafter. So, clients are very focused on April 2nd. I also suspect that at some various periods between now and then, we are likely to receive previews, in the form of various communications coming from the Trump administration on the types of policies that we may end up seeing delivered on April 2nd.And so, I suspect that between now and then there will be a crescendo in concern, perhaps, over what will come of U.S. trade policy for the balance of this year. And really for the balance of the next three and a half years.So, with that, Michael, thanks for taking the time to talk.Michael Gapen: Great speaking with you, Matt.Matthew Hornbach: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.","duration_ms":512573,"is_playable":true,"release_date":"2025-03-20","external_urls":{"spotify":"https://open.spotify.com/episode/4oTeYN0XkFqauWiEpLL43W"},"html_description":"

Our Global Head of Macro Strategy Matthew Hornbach and Chief U.S. Economist Michael Gapen discuss the outcome of the recent FOMC meeting, and the outlook for interest rates in 2025 and 2026.

Read more insights from Morgan Stanley.

----- Transcript -----

Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy.

Michael Gapen: And I'm Michael Gapen, Morgan Stanley's Chief U.S. Economist.

Matthew Hornbach: Today we're talking about the March Federal Open Market Committee meeting and the path for rates from here.

It's Thursday, March 20th at 10am in New York.

Mike, the Fed released a new set of projections yesterday. What do these say and what did you learn from them?

Michael Gapen: Yeah, Matt, well, the Fed's forecast actually now look a lot like our outlook for the U.S. economy. So, they revised down their expectation of growth. They revised up their expectation for inflation. So, it has a bit of a stagflation, slower growth, stickier inflation outlook – which is very much what we were thinking coming into this year. The Fed also, though, highlighted high policy uncertainty. They wrote down a forecast, but I'm not all that convinced that they have a lot of confidence in how things will evolve.

So, I think for me, really, the bigger story were their updated perceptions about uncertainty and risks to the outlook. So, in December, if you remember, they told us; virtually everybody on the committee said, uncertainty around inflation is high and risk to inflation to the upside. They complemented that this week with the fact that uncertainty around growth in the labor market is high, but risk to growth is to the downside, the unemployment rate to the upside. So, you have kind of competing risks here around the Fed's dual mandate. They've got upside risk to inflation, downside risk to growth.

To me, that's kind of the really important message. It's hard to have a confidence in a forecast right now, but I think that risk assessment is really interesting.

Matthew Hornbach: And with that in mind, and given all the policy uncertainty that the Fed mentioned, what did Powell say about how the Fed should react? In other words, what is appropriate policy at this stage?

Michael Gapen: Right. Yeah, it's tricky, right? So, on one side of your mandate, you think risks to inflation are squarely to the upside and growth in labor markets to the downside. So, what do you do? And I think Powell said, I think that the logical answer, which is, well, right now you do nothing, and you wait.

But then I think what Powell said is: How we think this plays out is – tariffs may boost inflation in the short run. Which we're going to try to ignore. And if the economy does weaken and the labor market softens, we'll ease policy in order to support activity, right? So, there might be, say, symmetric risks around their dual mandate, but there's asymmetry in the policy outlook.

He said we're either going to be on hold or we're going to be cutting rates. And generally, I think that's the right thing.

Matthew Hornbach: So, Mike, what I heard from you was that the Fed was going to look through inflation in the near term, and then eventually cut. I mean, do you think they can do that?

Michael Gapen: Yeah, I think, Matt, that's a great question. My answer to that is, I think it's easier said than done. We agree that the next move from the Fed is going to be a cut, but we think that cut comes much later.

This is a very data dependent Fed. So, I think in the moment, if tariffs boost inflation now and weaken activity later, it's easy to say, ‘I'm going to look through that and cut.’ But in practice, I think it's hard.

So, Matt, actually, at this point, though, I think I would actually kind of ask you the same question, but in a different way, right? We doubt the Fed may be able to do this. But the market priced in more rate cuts this year than we think is likely. How would you explain the market pricing and how far away from my expectation do you think it could run?

Matthew Hornbach: What’s really interesting about how the market has priced the recent events is – it’s actually pricing more in line with the spirt of your view. In the sense that the market has priced more rate cuts in 2026 than it’s pricing in 2025. So, in spirit, the market is very much with you. But as we like to say, the market price is an average of all possible outcomes. And if one of the outcomes is the Fed does nothing for the foreseeable future. And the other outcome is the Fed cuts aggressively this year. Then the market price has to reflect some degree of additional easing in 2025 that wouldn't necessarily be aligned with a rational baseline for Fed policy.

So, market in some ways is reflecting the idea that you're proposing in your forecast. But it's also reflecting the idea that it's a market and that it has to be priced for some amount of risk premia that the Fed is ultimately forced to cut rates more.

And in fact, if I can ask you a question relating to that, Mike, you know, the equity market at one point last week had fallen about 10 per cent from the highs.

Michael Gapen: Mm hmm.

Matthew Hornbach: Number one, is there a percentage drawdown that gets the Fed’s attention? You know, how does the Fed think about the equity market in an environment like this?

Michael Gapen: Yeah, I think the equity market, in my view, and I think the view of the Fed, is what I'll call a key spillover channel. Trade and manufacturing are relatively small shares of the economy. So, if we pursue restrictive trade policies, growth should slow, inflation may be firm. That's the Fed's essential baseline; it's ours. The risk here though is that somewhere in there you get a destabilizing period, equity markets fall, upper income consumers take a step back, and you have a much broader downturn at that point.

So, you ask a great question, how far do equity markets have to fall? Well, we get 10 per cent declines in equity markets on average about once a year, so it's not that. And the theory would say households have to view that decline in wealth as permanent, right? So, it has to be a fairly substantial decline.

Given how far wealth has risen, we're over [$]51 trillion now and an increase in net wealth since COVID. I think that decline has to be large. I would pencil in something, probably need about a 30 per cent decline in equity markets – before maybe that spillover risk gets very elevated.

So, Matt, if I can turn back, because, you know, I think we're in general agreement here on what we heard yesterday. But what I'd like to do in terms of looking forward, so aside from the usual communications coming from the Fed, after the blackout period, following the meeting. What do you think investors will be focusing on over the next month?

Matthew Hornbach: My sense is that there is already an unusual amount of focus on April 2nd.

You know, that is the day when the Trump administration is supposed to unveil their plan for reciprocal tariffs. It's unclear what tariffs will be implemented on April 2nd; what tariffs will be saved for a negotiating process thereafter. So, clients are very focused on April 2nd. I also suspect that at some various periods between now and then, we are likely to receive previews, in the form of various communications coming from the Trump administration on the types of policies that we may end up seeing delivered on April 2nd.

And so, I suspect that between now and then there will be a crescendo in concern, perhaps, over what will come of U.S. trade policy for the balance of this year. And really for the balance of the next three and a half years.

So, with that, Michael, thanks for taking the time to talk.

Michael Gapen: Great speaking with you, Matt.

Matthew Hornbach: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/11Z2UwJDXi6sEbvlZu2751/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"3acMBBrV3fOh55x74zCat1","uri":"spotify:episode:3acMBBrV3fOh55x74zCat1","href":"https://api.spotify.com/v1/episodes/3acMBBrV3fOh55x74zCat1","name":"Making a Bet on the Future of Betting","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"Our analysts Michael Cyprys and Stephen Grambling discuss prediction markets’ rising popularity and how they could disrupt the U.S. sports betting industry.----- Transcript -----Michael Cyprys: Welcome to Thoughts on the Market. I'm Mike Cyprys, Morgan Stanley's head of U.S. Brokers, Asset Managers, and Exchanges Research.Stephen Grambling: And I'm Stephen Grambling, head of U.S. Gaming, Lodging, and Leisure.Michael Cyprys: Today, we'll talk about sports betting and how prediction markets can disrupt it.It's Wednesday, March 19th at 10 am in New York.Sports betting used to be against the law in most of America, outside of Nevada. That changed in 2018, when the U.S. Supreme Court declared a federal ban on sports betting to be unconstitutional. As a result, many American states legalized sports betting. Over the last seven years, it's become even more popular and profitable. The American sports betting industry posted a record [$]13.7 billion of revenues last year. That's up from 2023's record of [$]11 billion, according to the American Gaming Association.Now, prediction markets are set to potentially disrupt this industry.Stephen, to set the stage, how is the U.S. sports betting industry currently organized and regulated?Stephen Grambling: Well, as you mentioned, Mike, with the overturning of the Professional and Amateur Sports Protection Act in 2018, legalization of sports betting turned to the states. The path to legislation varies by state with different constituents to consider – beyond even the local government. You know, Senate and Congress, but also tribal casinos, commercial casinos, sports teams, leagues, etc.We now have 38 states plus D.C. and Puerto Rico offering legal sports betting in some format, collecting billions of dollars in taxes in aggregate. At this point, the big states that are remaining are really only Texas, Florida, Georgia, and California. Each state forms its own framework across taxes, what sports can or can't bet on, and regulations around advertising. This means a separate commission for each state regulates the industry, in conjunction with state lawmakers,Michael Cyprys: I see. And what exactly are betting exchanges and how do they fit within the U.S. sports betting market?Stephen Grambling: Betting exchanges have existed for a long time in markets around the world. These are really exchanges – and are platforms – where individuals can bet directly against each other on an event outcome, rather than against a bookmaker. These exchanges match opposing bets and then take a commission on the winnings and typically offer better odds by eliminating traditional bookmaker margins.That said, the all in commission can range at two to five per cent. Whereas the spread on a traditional singles bet is about five to six per cent. So, it's relatively small. This is also known as the, the vigorish or the vig, or what the book gets to keep. Due to the need to be perfectly balanced as an exchange, these platforms, which operate in various markets, as I said around the world, are generally more akin to premarket, single bets. So single bet, or sometimes people call them straight bets, are really just betting on the outcome of a match or the over-under. They don't typically impact things like multi leg bets, also known as parlays, since there's less of a consistent betting pool.Because the type of bets are more limited than what a sports book offers, these exchanges somewhat plateaued in popularity in markets like the UK. For frame of reference, we estimate these singles bets are about $900 million in markets where it's legal for sports betting, and roughly another $800 million in states without legislation.Again, this is really just the market for people who only bet on that type of bet; that don't do both singles bets and parlays, or parlays alone.Mike, maybe turning it back to you, sports betting is a type of prediction market. But from where you sit, how would you define prediction markets more broadly, and can you give some examples?Michael Cyprys: Sure. So prediction markets are a type of marketplace where event contracts trade. Sometimes they're called forecast markets or even information markets. A core feature here is trading an outcome at an event, such as the November election, economic indicators, or even corporate events. But unlike futures contracts, event contracts have a defined risk and defined reward.Generally, they're structured as binary options, which can be easily understood. For instance, a contract could pay a dollar if the consumer price index, or CPI, exceeds say, 3 per cent in March. If an investor buys that contract for 75 cents, they could generate a 25 percent potential return if CPI comes in over 3 per cent and they collect a dollar on that contract.Now, the counterparty on the other side of that trade is the investor who sold that contract, collected the 75 cents, and they would stand to lose 25 cents potentially – if they held on to that contract, paid out the full dollar in the event that CPI came in hot.What's interesting is the price of that contract becomes the best forecast of that event happening, and so this can provide a lot of information value.Stephen Grambling: So, it sounds like you could bet on just about anything, so are these prediction markets legal?Michael Cyprys: Not only are they legal, they've been around for some time – though perhaps more esoteric in nature, in terms of where we have seen contracts and types of events traded on marketplaces. They've been geared more towards end users and farmers. For example, event contracts on the weather have been listed on a Chicago derivative exchange for over 25 years.What's new and interesting is that we're seeing new exchange upstarts enter the space. They're innovating, they're broadening access to retail investors, and they're benefiting from the confluence of a number of different trends around technology improvements – with mobile trading in recent years, the speed and access to information, the ease of account opening, broadly retail investors coming into the marketplace, and the pure simplicity and intuitive nature of event contracts.The 2024 election sparked people's interest in event contracts. And that's persisting post election. In the coming months, we do expect a large retail brokerage platform in the U.S. to really help potentially mainstream event contracts.Coming back to your legality point and question. One area of open debate, though, is around the legality of sports event contracts, where we expect regulators to provide some clarity around that in the months ahead.Stephen Grambling: Interesting, so some have also argued that the prediction markets are not just the future of trading, but for information in general. Do you think prediction markets can be a disruptive force in finance then?Michael Cyprys: Over time, potentially, yes. I do think that's going to require participation from both retail as well as institutional investors that can help fuel robust and liquid marketplace. The sheer simplicity is helpful in terms of driving retail adoption; but for institutional investors and corporates, they could look to prediction markets as a valuable hedging tool, with insurance-like properties – not to mention the information value that can be derived.Stephen, given our discussion of prediction markets and their relevance for sports betting, how are you framing the potential for risk and opportunity for the sports betting industry from the application of prediction market models?Stephen Grambling: There's a bit of a put and take wherein existing sports betting markets, that's where it's legal, the industry may face new competition. So, the incumbents will face new competition from these prediction markets being opened up. On the other hand, a new regulatory framework could also open up new states; so the states that I referenced before that are still out there that haven't been legalized, all of a sudden become fair game.Given the size of these new states, as I mentioned, folks like California, Texas, Florida; these are enormous economies, and they're roughly equal to the size of the existing markets. So, the potential upside opportunity, we think, actually outweighs the competitive risks. And we quantify this as being potentially in the hundreds of millions of dollars, an incremental EBITDA to some of the incumbents that operate in the space.Michael Cyprys: That's fascinating, Stephen. Thanks for taking the time to talk.Stephen Grambling: Great speaking with you, Mike.Michael Cyprys: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.","duration_ms":467147,"is_playable":true,"release_date":"2025-03-19","external_urls":{"spotify":"https://open.spotify.com/episode/3acMBBrV3fOh55x74zCat1"},"html_description":"

Our analysts Michael Cyprys and Stephen Grambling discuss prediction markets’ rising popularity and how they could disrupt the U.S. sports betting industry.

----- Transcript -----

Michael Cyprys: Welcome to Thoughts on the Market. I'm Mike Cyprys, Morgan Stanley's head of U.S. Brokers, Asset Managers, and Exchanges Research.

Stephen Grambling: And I'm Stephen Grambling, head of U.S. Gaming, Lodging, and Leisure.

Michael Cyprys: Today, we'll talk about sports betting and how prediction markets can disrupt it.

It's Wednesday, March 19th at 10 am in New York.

Sports betting used to be against the law in most of America, outside of Nevada. That changed in 2018, when the U.S. Supreme Court declared a federal ban on sports betting to be unconstitutional. As a result, many American states legalized sports betting. Over the last seven years, it's become even more popular and profitable. The American sports betting industry posted a record [$]13.7 billion of revenues last year. That's up from 2023's record of [$]11 billion, according to the American Gaming Association.

Now, prediction markets are set to potentially disrupt this industry.

Stephen, to set the stage, how is the U.S. sports betting industry currently organized and regulated?

Stephen Grambling: Well, as you mentioned, Mike, with the overturning of the Professional and Amateur Sports Protection Act in 2018, legalization of sports betting turned to the states. The path to legislation varies by state with different constituents to consider – beyond even the local government. You know, Senate and Congress, but also tribal casinos, commercial casinos, sports teams, leagues, etc.

We now have 38 states plus D.C. and Puerto Rico offering legal sports betting in some format, collecting billions of dollars in taxes in aggregate. At this point, the big states that are remaining are really only Texas, Florida, Georgia, and California. Each state forms its own framework across taxes, what sports can or can't bet on, and regulations around advertising. This means a separate commission for each state regulates the industry, in conjunction with state lawmakers,

Michael Cyprys: I see. And what exactly are betting exchanges and how do they fit within the U.S. sports betting market?

Stephen Grambling: Betting exchanges have existed for a long time in markets around the world. These are really exchanges – and are platforms – where individuals can bet directly against each other on an event outcome, rather than against a bookmaker. These exchanges match opposing bets and then take a commission on the winnings and typically offer better odds by eliminating traditional bookmaker margins.

That said, the all in commission can range at two to five per cent. Whereas the spread on a traditional singles bet is about five to six per cent. So, it's relatively small. This is also known as the, the vigorish or the vig, or what the book gets to keep. Due to the need to be perfectly balanced as an exchange, these platforms, which operate in various markets, as I said around the world, are generally more akin to premarket, single bets. So single bet, or sometimes people call them straight bets, are really just betting on the outcome of a match or the over-under. They don't typically impact things like multi leg bets, also known as parlays, since there's less of a consistent betting pool.

Because the type of bets are more limited than what a sports book offers, these exchanges somewhat plateaued in popularity in markets like the UK. For frame of reference, we estimate these singles bets are about $900 million in markets where it's legal for sports betting, and roughly another $800 million in states without legislation.

Again, this is really just the market for people who only bet on that type of bet; that don't do both singles bets and parlays, or parlays alone.

Mike, maybe turning it back to you, sports betting is a type of prediction market. But from where you sit, how would you define prediction markets more broadly, and can you give some examples?

Michael Cyprys: Sure. So prediction markets are a type of marketplace where event contracts trade. Sometimes they're called forecast markets or even information markets. A core feature here is trading an outcome at an event, such as the November election, economic indicators, or even corporate events. But unlike futures contracts, event contracts have a defined risk and defined reward.

Generally, they're structured as binary options, which can be easily understood. For instance, a contract could pay a dollar if the consumer price index, or CPI, exceeds say, 3 per cent in March. If an investor buys that contract for 75 cents, they could generate a 25 percent potential return if CPI comes in over 3 per cent and they collect a dollar on that contract.

Now, the counterparty on the other side of that trade is the investor who sold that contract, collected the 75 cents, and they would stand to lose 25 cents potentially – if they held on to that contract, paid out the full dollar in the event that CPI came in hot.

What's interesting is the price of that contract becomes the best forecast of that event happening, and so this can provide a lot of information value.

Stephen Grambling: So, it sounds like you could bet on just about anything, so are these prediction markets legal?

Michael Cyprys: Not only are they legal, they've been around for some time – though perhaps more esoteric in nature, in terms of where we have seen contracts and types of events traded on marketplaces. They've been geared more towards end users and farmers. For example, event contracts on the weather have been listed on a Chicago derivative exchange for over 25 years.

What's new and interesting is that we're seeing new exchange upstarts enter the space. They're innovating, they're broadening access to retail investors, and they're benefiting from the confluence of a number of different trends around technology improvements – with mobile trading in recent years, the speed and access to information, the ease of account opening, broadly retail investors coming into the marketplace, and the pure simplicity and intuitive nature of event contracts.

The 2024 election sparked people's interest in event contracts. And that's persisting post election. In the coming months, we do expect a large retail brokerage platform in the U.S. to really help potentially mainstream event contracts.

Coming back to your legality point and question. One area of open debate, though, is around the legality of sports event contracts, where we expect regulators to provide some clarity around that in the months ahead.

Stephen Grambling: Interesting, so some have also argued that the prediction markets are not just the future of trading, but for information in general. Do you think prediction markets can be a disruptive force in finance then?

Michael Cyprys: Over time, potentially, yes. I do think that's going to require participation from both retail as well as institutional investors that can help fuel robust and liquid marketplace. The sheer simplicity is helpful in terms of driving retail adoption; but for institutional investors and corporates, they could look to prediction markets as a valuable hedging tool, with insurance-like properties – not to mention the information value that can be derived.

Stephen, given our discussion of prediction markets and their relevance for sports betting, how are you framing the potential for risk and opportunity for the sports betting industry from the application of prediction market models?

Stephen Grambling: There's a bit of a put and take wherein existing sports betting markets, that's where it's legal, the industry may face new competition. So, the incumbents will face new competition from these prediction markets being opened up. On the other hand, a new regulatory framework could also open up new states; so the states that I referenced before that are still out there that haven't been legalized, all of a sudden become fair game.

Given the size of these new states, as I mentioned, folks like California, Texas, Florida; these are enormous economies, and they're roughly equal to the size of the existing markets. So, the potential upside opportunity, we think, actually outweighs the competitive risks. And we quantify this as being potentially in the hundreds of millions of dollars, an incremental EBITDA to some of the incumbents that operate in the space.

Michael Cyprys: That's fascinating, Stephen. Thanks for taking the time to talk.

Stephen Grambling: Great speaking with you, Mike.

Michael Cyprys: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/7lFfqlFKOncjc15QBYqfr2/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"5qaq7xxCHb1JuMJHiUkvzr","uri":"spotify:episode:5qaq7xxCHb1JuMJHiUkvzr","href":"https://api.spotify.com/v1/episodes/5qaq7xxCHb1JuMJHiUkvzr","name":"What Could Weaken Strong Credit","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"Our Chief Fixed Income Strategist Vishy Tirupattur explains why credit markets have held firm amid macro volatility, and the scenarios which could hurt its strong foundation.----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley’s Chief Fixed Income Strategist. Today, I will talk about why credit markets have been resilient even as other markets have been volatile – and market implications going forward. It's Tuesday, March 18th, at 11 am in New York. Market sentiment has shifted quickly from post-election euphoria and animal spirits to increasingly growing concern about downside risks to the U.S. economy, driven by ongoing policy uncertainty and a spate of uninspiring soft data. However, signaling from different markets has not been uniform. For example, after reaching an all-time high just a few weeks ago, the S&P 500 index has given up all of its gains since the election and then some. Treasury yields have also yo-yoed, from a 40-basis points selloff to a 60+ basis points rally. Yet in the middle of this volatility in equities and rates, credit markets have barely budged. In other words, credit has been a low beta asset class so far. This resilience which resonates with our long-standing constructive view on credit has strong underpinnings. We had expected that many of the supporting factors from 2024 would continue – such as solid credit fundamentals, strong investor demand driven by elevated overall yields rather than the level of spreads. While we expected the economic growth in 2025 to slow somewhat, to about 2 per cent, we thought that would still be a robust level for credit investors. These expectations have largely played out until recently. While we maintain our overall positive stance on credit, some of the factors contributing to its resilience are changing, calling the persistence of credit’s low beta into question. While we did anticipate that sequencing and severity of policy would be key drivers of the economy and markets in 2025, growth constraining policies, especially tariffs, have come in faster and broader than what we had penciled in. Incorporating these policy signals, our U.S. economists have marked down real GDP growth to 1.5 per cent in 2025 and 1.2 per cent in 2026. From a credit perspective, we would highlight that our economists are not calling for a recession. Their growth expectations still leave us in territory we would deem credit friendly, although edging towards the bottom of our comfort zone. On the positive side of the ledger, cooling growth may also temper animal spirits and continue to constrain corporate debt supply, keeping market technicals supportive. Also, while treasury yields have rallied, overall yields are still at levels that sustain demand from yield-motivated buyers. That said, if growth concerns intensify from these levels, with weakness in soft data spreading notably to hard data, the probability of markets assigning above-average recession probabilities will increase. This could challenge credit’s low beta, that has prevailed so far, and the credit beta could increase on further drawdowns in risk assets. Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.","duration_ms":214465,"is_playable":true,"release_date":"2025-03-18","external_urls":{"spotify":"https://open.spotify.com/episode/5qaq7xxCHb1JuMJHiUkvzr"},"html_description":"

Our Chief Fixed Income Strategist Vishy Tirupattur explains why credit markets have held firm amid macro volatility, and the scenarios which could hurt its strong foundation.

----- Transcript -----

Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley’s Chief Fixed Income Strategist. Today, I will talk about why credit markets have been resilient even as other markets have been volatile – and market implications going forward.

It's Tuesday, March 18th, at 11 am in New York.

Market sentiment has shifted quickly from post-election euphoria and animal spirits to increasingly growing concern about downside risks to the U.S. economy, driven by ongoing policy uncertainty and a spate of uninspiring soft data. However, signaling from different markets has not been uniform.

For example, after reaching an all-time high just a few weeks ago, the S&P 500 index has given up all of its gains since the election and then some. Treasury yields have also yo-yoed, from a 40-basis points selloff to a 60+ basis points rally. Yet in the middle of this volatility in equities and rates, credit markets have barely budged. In other words, credit has been a low beta asset class so far.

This resilience which resonates with our long-standing constructive view on credit has strong underpinnings. We had expected that many of the supporting factors from 2024 would continue – such as solid credit fundamentals, strong investor demand driven by elevated overall yields rather than the level of spreads. While we expected the economic growth in 2025 to slow somewhat, to about 2 per cent, we thought that would still be a robust level for credit investors. These expectations have largely played out until recently. While we maintain our overall positive stance on credit, some of the factors contributing to its resilience are changing, calling the persistence of credit’s low beta into question.

While we did anticipate that sequencing and severity of policy would be key drivers of the economy and markets in 2025, growth constraining policies, especially tariffs, have come in faster and broader than what we had penciled in. Incorporating these policy signals, our U.S. economists have marked down real GDP growth to 1.5 per cent in 2025 and 1.2 per cent in 2026.

From a credit perspective, we would highlight that our economists are not calling for a recession. Their growth expectations still leave us in territory we would deem credit friendly, although edging towards the bottom of our comfort zone. On the positive side of the ledger, cooling growth may also temper animal spirits and continue to constrain corporate debt supply, keeping market technicals supportive. Also, while treasury yields have rallied, overall yields are still at levels that sustain demand from yield-motivated buyers.

That said, if growth concerns intensify from these levels, with weakness in soft data spreading notably to hard data, the probability of markets assigning above-average recession probabilities will increase. This could challenge credit’s low beta, that has prevailed so far, and the credit beta could increase on further drawdowns in risk assets.

Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/7shPUAcEV7kHFFRDg34JHA/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"0ojLEAwLM3oXpgVSiWsX2Z","uri":"spotify:episode:0ojLEAwLM3oXpgVSiWsX2Z","href":"https://api.spotify.com/v1/episodes/0ojLEAwLM3oXpgVSiWsX2Z","name":"Is the Correction Over Yet?","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"Our CIO and Chief U.S. Equity Strategist Mike Wilson explains the stock market tumble and whether investors can hope for a rally.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast I’ll be discussing the recent Equity Market correction and what to look for next. It's Monday, March 17th at 11:30am in New York. So let’s get after it. Major U.S. equity Indices are as oversold as they've been since 2022. Sentiment, positioning gauges are bearish, and seasonals improve in the second half of March for earnings revisions and price. Furthermore, recent dollar weakness should provide a tailwind to first quarter earnings season and second quarter guidance, particularly relative to the fourth quarter results; and the decline in rates should benefit economic surprises. In short, I stand by our view that 5,500 on the S&P 500 should provide support for a tradable rally led by lower quality, higher beta stocks that have sold off the most, and it looks like it may have started on Friday. The more important question is whether such a rally is likely to extend into something more durable and mark the end of the volatility we’ve seen YTD? The short answer is – probably not. First, from a technical standpoint there has been significant damage to the major indices—more than what we witnessed in recent 10 per cent corrections, like last summer. More specifically, the S&P 500, Nasdaq 100, Russell 1000 growth and value indices have all traded straight through their respective 200-day moving averages, making these levels now resistance, rather than support. Meanwhile, many stocks are closer to a 20 per cent correction with the lower quality Russell 2000 falling below its 200 week moving average for the first time since the 2022 bear market. At a minimum, this kind of technical damage will take time to repair, even if we don’t get additional price degradation at the index level. In order to forecast a larger, sustainable recovery, it’s important to acknowledge what’s really been driving this correction. From my conversations with institutional investors, there appears to be a lot of focus on the tariff announcements and other rapid-fire policy announcements from the new administration. While these factors are weighing on sentiment and confidence, other factors started this correction in December. In our year ahead outlook, we forecasted a tougher first half of the year for several reasons. First, stocks were extended on a valuation basis and relative to the key macro and fundamental drivers like earnings revisions, which peaked in early December. Second, the Fed went on hold in mid-December after aggressively cutting rates by 100 basis points over the prior three months. Third, we expected AI capex growth to decelerate this year and investors now have the DeepSeek development to consider. Add in immigration enforcement, the Department of Government Efficiency (DOGE) exceeding expectations, and tariffs – and it’s no surprise that growth expectations are hitting equities in the form of lower multiples. As noted, we highlighted these growth headwinds in December and have been citing a first half range for the S&P 500 of 5500-6100 with a preference for large cap quality. Finally, President Trump has recently indicated he is not focused on the stock market in the near term as a barometer of his policies and agenda. Perhaps more than anything else, this is what led to the most recent technical breakdown in the S&P 500. In my view, it will take more than just an oversold market to get more than a tradable rally. Earnings revisions are the most important variable and while we could see some seasonal strength or stabilization in revisions, we believe it will take a few quarters for this factor to resume a positive uptrend. As noted in our outlook, the growth-positive policy changes like tax cuts, de-regulation, less crowding out and lower yields could arrive later in the second half of the year – but we think that’s too far away for the market to contemplate for now. Finally, while the Trump put apparently doesn’t exist, the Fed put is alive and well, in our view. However, that will likely require conditions to get worse either on growth, especially labor, or in the credit and funding market, neither of which would be equity-positive, initially. Bottom line, a short-term rally from our targeted 5500 level is looking more likely after Friday’s price action. It’s also being led by lower quality stocks. This helps support my secondary view that the current rally is unlikely to lead to new highs until the numerous growth headwinds are reversed or monetary policy is loosened once again. The transition from a government heavy economy to one that is more privately driven should ultimately be better for many stocks. But the path is going to take time and it is unlikely to be smooth. Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.","duration_ms":333923,"is_playable":true,"release_date":"2025-03-17","external_urls":{"spotify":"https://open.spotify.com/episode/0ojLEAwLM3oXpgVSiWsX2Z"},"html_description":"

Our CIO and Chief U.S. Equity Strategist Mike Wilson explains the stock market tumble and whether investors can hope for a rally.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast I’ll be discussing the recent Equity Market correction and what to look for next.

It's Monday, March 17th at 11:30am in New York.

So let’s get after it.

Major U.S. equity Indices are as oversold as they've been since 2022. Sentiment, positioning gauges are bearish, and seasonals improve in the second half of March for earnings revisions and price. Furthermore, recent dollar weakness should provide a tailwind to first quarter earnings season and second quarter guidance, particularly relative to the fourth quarter results; and the decline in rates should benefit economic surprises. In short, I stand by our view that 5,500 on the S&P 500 should provide support for a tradable rally led by lower quality, higher beta stocks that have sold off the most, and it looks like it may have started on Friday.

The more important question is whether such a rally is likely to extend into something more durable and mark the end of the volatility we’ve seen YTD? The short answer is – probably not.

First, from a technical standpoint there has been significant damage to the major indices—more than what we witnessed in recent 10 per cent corrections, like last summer. More specifically, the S&P 500, Nasdaq 100, Russell 1000 growth and value indices have all traded straight through their respective 200-day moving averages, making these levels now resistance, rather than support. Meanwhile, many stocks are closer to a 20 per cent correction with the lower quality Russell 2000 falling below its 200 week moving average for the first time since the 2022 bear market. At a minimum, this kind of technical damage will take time to repair, even if we don’t get additional price degradation at the index level.

In order to forecast a larger, sustainable recovery, it’s important to acknowledge what’s really been driving this correction. From my conversations with institutional investors, there appears to be a lot of focus on the tariff announcements and other rapid-fire policy announcements from the new administration. While these factors are weighing on sentiment and confidence, other factors started this correction in December.

In our year ahead outlook, we forecasted a tougher first half of the year for several reasons. First, stocks were extended on a valuation basis and relative to the key macro and fundamental drivers like earnings revisions, which peaked in early December. Second, the Fed went on hold in mid-December after aggressively cutting rates by 100 basis points over the prior three months. Third, we expected AI capex growth to decelerate this year and investors now have the DeepSeek development to consider. Add in immigration enforcement, the Department of Government Efficiency (DOGE) exceeding expectations, and tariffs – and it’s no surprise that growth expectations are hitting equities in the form of lower multiples.

As noted, we highlighted these growth headwinds in December and have been citing a first half range for the S&P 500 of 5500-6100 with a preference for large cap quality. Finally, President Trump has recently indicated he is not focused on the stock market in the near term as a barometer of his policies and agenda. Perhaps more than anything else, this is what led to the most recent technical breakdown in the S&P 500.

In my view, it will take more than just an oversold market to get more than a tradable rally. Earnings revisions are the most important variable and while we could see some seasonal strength or stabilization in revisions, we believe it will take a few quarters for this factor to resume a positive uptrend. As noted in our outlook, the growth-positive policy changes like tax cuts, de-regulation, less crowding out and lower yields could arrive later in the second half of the year – but we think that’s too far away for the market to contemplate for now.

Finally, while the Trump put apparently doesn’t exist, the Fed put is alive and well, in our view. However, that will likely require conditions to get worse either on growth, especially labor, or in the credit and funding market, neither of which would be equity-positive, initially.

Bottom line, a short-term rally from our targeted 5500 level is looking more likely after Friday’s price action. It’s also being led by lower quality stocks. This helps support my secondary view that the current rally is unlikely to lead to new highs until the numerous growth headwinds are reversed or monetary policy is loosened once again. The transition from a government heavy economy to one that is more privately driven should ultimately be better for many stocks. But the path is going to take time and it is unlikely to be smooth.

Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/2tLD8yC1EM8gXdodf956dr/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"3Mi6gFw5wjBGP4CgGstHPk","uri":"spotify:episode:3Mi6gFw5wjBGP4CgGstHPk","href":"https://api.spotify.com/v1/episodes/3Mi6gFw5wjBGP4CgGstHPk","name":"Credit Markets Remain Resilient, For Now","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"As equity markets gyrate in response to unpredictable U.S. policy, credit has taken longer to respond. Our Head of Corporate Credit Research, Andrew Sheets, suggests other indicators investors should have an eye on, including growth data.----- Transcript -----Welcome to Thoughts on the Market. I’m Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today on the podcast, I’ll be discussing how much comfort or concern equity and credit markets should be taking from each other’s recent moves.It’s Friday, March 14th at 2pm in London. Credit has weakened as markets have gyrated in the face of rising uncertainty around U.S. economic policy. But it has been a clear outperformer. The credit market has taken longer to react to recent headlines, and seen a far more modest response to them. While the U.S. stock market, measured as the S&P 500, is down about 10 per cent, the U.S. High Yield bond index, comprised of lower-rated corporate bonds, is down about just 1 per cent.How much comfort should stock markets take from credit’s resilience? And what could cause Credit to now catch-down to that larger weakness in equities?A good place to start with these questions is what we think are really three distinct stories behind the volatility and weakness that we’re seeing in markets. First, the nature of U.S. policy towards tariffs, with plenty of on-again, off-again drama, has weakened business confidence and dealmaking; and that’s cut off a key source of corporate animal spirits and potential upside in the market. Second and somewhat relatedly, that reduced upside has lowered enthusiasm for many of the stocks that had previously been doing the best. Many of these stocks were widely held, and that’s created vulnerability and forced selling as previously popular positions were cut. And third, there have been growing concerns that this lower confidence from businesses and consumers will spill over into actual spending, and raise the odds of weaker growth and even a recession.I think a lot of credit’s resilience over the last month and a half, can be chalked up to the fact that the asset class is rightfully more relaxed about the first two of these issues. Lower corporate confidence may be a problem for the stock market, but it can actually be an ok thing if you’re a lender because it keeps borrowers more conservative. And somewhat relatedly, the sell-off in popular, high-flying stocks is also less of an issue. A lot of these companies are, for the most part, quite different from the issuers that dominate the corporate credit market.But the third issue, however, is a big deal. Credit is extremely sensitive to large changes in the economy. Morgan Stanley’s recent downgrade of U.S. growth expectations, the lower prices on key commodities, the lower yields on government bonds and the underperformance of smaller more cyclical stocks are all potential signs that risks to growth are rising. It's these factors that the credit market, perhaps a little bit belatedly, is now reacting to.So what does this all mean?First, we’re mindful of the temptation for equity investors to look over at the credit market and take comfort from its resilience. But remember, two of the biggest issues that have faced stocks – those lower odds of animal spirits, and the heavy concentration in a lot of the same names – were never really a credit story. And so to feel better about those risks, we think you’ll want to look at other different indicators.Second, what about the risk from the other direction, that credit catches up – or maybe more accurately down – to the stock market? This is all about that third factor: growth. If the growth data holds up, we think credit investors will feel justified in their more modest reaction, as all-in yields remain good. But if data weakens, the risks to credit grow rapidly, especially as our U.S. economists think that the Fed could struggle to lower interest rates as fast as markets are currently hoping they will.And so with growth so important, and Morgan Stanley’s tracking estimates for U.S. growth currently weak, we think it's too early to go bottom fishing in corporate bonds. Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.","duration_ms":265743,"is_playable":true,"release_date":"2025-03-14","external_urls":{"spotify":"https://open.spotify.com/episode/3Mi6gFw5wjBGP4CgGstHPk"},"html_description":"

As equity markets gyrate in response to unpredictable U.S. policy, credit has taken longer to respond. Our Head of Corporate Credit Research, Andrew Sheets, suggests other indicators investors should have an eye on, including growth data.

----- Transcript -----

Welcome to Thoughts on the Market. I’m Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley.

Today on the podcast, I’ll be discussing how much comfort or concern equity and credit markets should be taking from each other’s recent moves.

It’s Friday, March 14th at 2pm in London.

Credit has weakened as markets have gyrated in the face of rising uncertainty around U.S. economic policy. But it has been a clear outperformer. The credit market has taken longer to react to recent headlines, and seen a far more modest response to them. While the U.S. stock market, measured as the S&P 500, is down about 10 per cent, the U.S. High Yield bond index, comprised of lower-rated corporate bonds, is down about just 1 per cent.

How much comfort should stock markets take from credit’s resilience? And what could cause Credit to now catch-down to that larger weakness in equities?

A good place to start with these questions is what we think are really three distinct stories behind the volatility and weakness that we’re seeing in markets.

First, the nature of U.S. policy towards tariffs, with plenty of on-again, off-again drama, has weakened business confidence and dealmaking; and that’s cut off a key source of corporate animal spirits and potential upside in the market.

Second and somewhat relatedly, that reduced upside has lowered enthusiasm for many of the stocks that had previously been doing the best. Many of these stocks were widely held, and that’s created vulnerability and forced selling as previously popular positions were cut.

And third, there have been growing concerns that this lower confidence from businesses and consumers will spill over into actual spending, and raise the odds of weaker growth and even a recession.

I think a lot of credit’s resilience over the last month and a half, can be chalked up to the fact that the asset class is rightfully more relaxed about the first two of these issues. Lower corporate confidence may be a problem for the stock market, but it can actually be an ok thing if you’re a lender because it keeps borrowers more conservative. And somewhat relatedly, the sell-off in popular, high-flying stocks is also less of an issue. A lot of these companies are, for the most part, quite different from the issuers that dominate the corporate credit market.

But the third issue, however, is a big deal. Credit is extremely sensitive to large changes in the economy. Morgan Stanley’s recent downgrade of U.S. growth expectations, the lower prices on key commodities, the lower yields on government bonds and the underperformance of smaller more cyclical stocks are all potential signs that risks to growth are rising. It's these factors that the credit market, perhaps a little bit belatedly, is now reacting to.

So what does this all mean?

First, we’re mindful of the temptation for equity investors to look over at the credit market and take comfort from its resilience. But remember, two of the biggest issues that have faced stocks – those lower odds of animal spirits, and the heavy concentration in a lot of the same names – were never really a credit story. And so to feel better about those risks, we think you’ll want to look at other different indicators.

Second, what about the risk from the other direction, that credit catches up – or maybe more accurately down – to the stock market? This is all about that third factor: growth. If the growth data holds up, we think credit investors will feel justified in their more modest reaction, as all-in yields remain good. But if data weakens, the risks to credit grow rapidly, especially as our U.S. economists think that the Fed could struggle to lower interest rates as fast as markets are currently hoping they will.

And so with growth so important, and Morgan Stanley’s tracking estimates for U.S. growth currently weak, we think it's too early to go bottom fishing in corporate bonds.

Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/4mfkwOzPNoqe9y1xHpiBIx/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"0vTKtwWB1bKbb8lYnhOY56","uri":"spotify:episode:0vTKtwWB1bKbb8lYnhOY56","href":"https://api.spotify.com/v1/episodes/0vTKtwWB1bKbb8lYnhOY56","name":"India’s Resurgence Should Weather Trade Tensions","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"Our Chief Asia Economist Chetan Ahya discusses the early indications of India’s economic recovery and why the country looks best-positioned in the region for growth.----- Transcript -----Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan Stanley’s Chief Asia Economist. Today I’ll be taking a look at the Indian economy amidst escalating trade tensions in Asia and around the globe. It’s Thursday, March 13, at 2pm in Hong Kong.Over the last few months, investors have been skeptical about India’s growth narrative. Investors – like us – have been caught off-guard by the surprising recent slowdown in India’s growth. With the benefit of hindsight, we can very clearly attribute the slowdown to an unexpected double tightening of fiscal and monetary policy. But India seems to be on its way to recovery. Green shoots are already emerging in recent data. And we believe the recovery will continue to firm up over the coming months. What makes us so confident in our outlook for India? We see several key factors behind this trend: First, fiscal policy’s turning supportive for growth again. The government has been ramping up capital expenditure for infrastructure projects like roads and railways, with growth accelerating markedly in recent months. They have also cut income tax for households which will be effective from April 2025. Second, monetary policy easing across rates, liquidity, and the regulatory front. With CPI inflation recently printing at just 3.6 per cent which is below target, we believe the central bank will continue to pursue easy monetary policy. And third, moderation in food inflation will mean real household incomes will be lifted. Finally, the strength in services exports. Services exports include IT services, and increasingly business services. In fact, post-COVID India’s had very strong growth in business services exports. And the key reason for that is, post-COVID, I think businesses have come to realize that if you can work from home, you can work from Bangalore. India's services exports have nearly doubled since December 2020, outpacing the 40 per cent rise in goods exports over the same period. This has resulted in services exports reaching $410 billion on an annualized basis in January, almost equal to the $430 billion of goods exports. Moreover, India continues to gain market share in services exports, which now account for 4.5 per cent of the global total, up from 4 per cent in 2020. To be sure there are some risks. India does face reciprocal tariff risks due to its large trade surplus with the US and high tariff rates that India imposes select imports from the U.S. But we believe that by September-October this year, India can reach a trade deal with the U.S. In any case, India's goods exports-to-GDP ratio is the lowest in the region. And even if global trade slows down due to tariff uncertainties, India's economy won't be as severely affected. In fact, it could potentially outperform the other economies in the region.Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.","duration_ms":209188,"is_playable":true,"release_date":"2025-03-13","external_urls":{"spotify":"https://open.spotify.com/episode/0vTKtwWB1bKbb8lYnhOY56"},"html_description":"

Our Chief Asia Economist Chetan Ahya discusses the early indications of India’s economic recovery and why the country looks best-positioned in the region for growth.

----- Transcript -----

Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan Stanley’s Chief Asia Economist.

Today I’ll be taking a look at the Indian economy amidst escalating trade tensions in Asia and around the globe.

It’s Thursday, March 13, at 2pm in Hong Kong.

Over the last few months, investors have been skeptical about India’s growth narrative. Investors – like us – have been caught off-guard by the surprising recent slowdown in India’s growth. With the benefit of hindsight, we can very clearly attribute the slowdown to an unexpected double tightening of fiscal and monetary policy.

But India seems to be on its way to recovery. Green shoots are already emerging in recent data. And we believe the recovery will continue to firm up over the coming months. What makes us so confident in our outlook for India?

We see several key factors behind this trend:

First, fiscal policy’s turning supportive for growth again. The government has been ramping up capital expenditure for infrastructure projects like roads and railways, with growth accelerating markedly in recent months. They have also cut income tax for households which will be effective from April 2025.

Second, monetary policy easing across rates, liquidity, and the regulatory front. With CPI inflation recently printing at just 3.6 per cent which is below target, we believe the central bank will continue to pursue easy monetary policy.

And third, moderation in food inflation will mean real household incomes will be lifted.

Finally, the strength in services exports. Services exports include IT services, and increasingly business services. In fact, post-COVID India’s had very strong growth in business services exports. And the key reason for that is, post-COVID, I think businesses have come to realize that if you can work from home, you can work from Bangalore.

India's services exports have nearly doubled since December 2020, outpacing the 40 per cent rise in goods exports over the same period. This has resulted in services exports reaching $410 billion on an annualized basis in January, almost equal to the $430 billion of goods exports. Moreover, India continues to gain market share in services exports, which now account for 4.5 per cent of the global total, up from 4 per cent in 2020.

To be sure there are some risks. India does face reciprocal tariff risks due to its large trade surplus with the US and high tariff rates that India imposes select imports from the U.S. But we believe that by September-October this year, India can reach a trade deal with the U.S.

In any case, India's goods exports-to-GDP ratio is the lowest in the region. And even if global trade slows down due to tariff uncertainties, India's economy won't be as severely affected. In fact, it could potentially outperform the other economies in the region.

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/3DoCpUCs7kzqq4N4GZVz8a/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"5C8tfUbhBS4lZkQOZkbFiM","uri":"spotify:episode:5C8tfUbhBS4lZkQOZkbFiM","href":"https://api.spotify.com/v1/episodes/5C8tfUbhBS4lZkQOZkbFiM","name":"The Other Policy Choices That Matter","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"While tariffs continue to dominate headlines, our Global Head of Fixed Income Research and Public Policy Strategy Michael Zezas suggests investors should also focus on the sectoral impacts of additional U.S. policy choices.----- Transcript -----Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income Research and Public Policy Strategy. Today, we’ll be talking about U.S. policy impacts on the market that aren’t about tariffs.It’s Wednesday, March 12th, at 10:30am in New York.If tariffs are dominating your attention, we sympathize. Again this week we heard the U.S. commit to raising tariffs and work out a resolution, this time all within the span of a workday. These twists and turns in the tariff path are likely to continue, but in the meantime it might make sense for investors to take some time to look away – instead focusing on some key sectoral impacts of U.S. policy choices that our Research colleagues have called out. For example, Andrew Percoco, who leads our Clean Energy Equity Research team, calls out that clean Energy stocks may be pricing in too high a probability of an Inflation Reduction Act (IRA) repeal. He cites a letter signed by 18 Republicans urging the speaker of the house to protect some of the energy tax credits in the IRA. That’s a good call out, in our view. Republicans’ slim majority means only a handful need to oppose a legislative action in order to block its enactment. Another example is around Managed Care companies. Erin Wright, who leads our Healthcare Services Research Effort, analyzed the impact to companies of cuts to the Medicaid program and found the impact to their sector’s bottom line to be manageable. So, keeping an in-line view for the sector. We think the sector won’t ultimately face this risk, as, like with the IRA, we do not expect there to be sufficient Republican votes to enact the cuts. Finally, Patrick Wood, who leads the Medtech team, caught up with a former FDA director to talk about how staffing cuts might affect the industry. In short, expect delays in approvals of new medical technologies. In particular, it seems the risk is most acute in the most cutting edge technologies, where skilled FDA staff are hard to find. Neurology and brain/computer interfaces stand out as areas of development that might slow in this market sector. All that said, if you just can’t turn away from tariffs, we reiterate our guidance here: Tariffs are likely going up, even if the precise path is uncertain. And whether or not you’re constructive on the goals the administration is attempting to achieve, the path to achieving them carries costs and execution risk. Our U.S. economics team’s recent downgrade of the U.S. growth outlook for this and next year exemplifies this. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.","duration_ms":172956,"is_playable":true,"release_date":"2025-03-12","external_urls":{"spotify":"https://open.spotify.com/episode/5C8tfUbhBS4lZkQOZkbFiM"},"html_description":"

While tariffs continue to dominate headlines, our Global Head of Fixed Income Research and Public Policy Strategy Michael Zezas suggests investors should also focus on the sectoral impacts of additional U.S. policy choices.

----- Transcript -----

Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income Research and Public Policy Strategy. Today, we’ll be talking about U.S. policy impacts on the market that aren’t about tariffs.

It’s Wednesday, March 12th, at 10:30am in New York.

If tariffs are dominating your attention, we sympathize. Again this week we heard the U.S. commit to raising tariffs and work out a resolution, this time all within the span of a workday.

These twists and turns in the tariff path are likely to continue, but in the meantime it might make sense for investors to take some time to look away – instead focusing on some key sectoral impacts of U.S. policy choices that our Research colleagues have called out.

For example, Andrew Percoco, who leads our Clean Energy Equity Research team, calls out that clean Energy stocks may be pricing in too high a probability of an Inflation Reduction Act (IRA) repeal. He cites a letter signed by 18 Republicans urging the speaker of the house to protect some of the energy tax credits in the IRA. That’s a good call out, in our view. Republicans’ slim majority means only a handful need to oppose a legislative action in order to block its enactment.

Another example is around Managed Care companies. Erin Wright, who leads our Healthcare Services Research Effort, analyzed the impact to companies of cuts to the Medicaid program and found the impact to their sector’s bottom line to be manageable. So, keeping an in-line view for the sector. We think the sector won’t ultimately face this risk, as, like with the IRA, we do not expect there to be sufficient Republican votes to enact the cuts.

Finally, Patrick Wood, who leads the Medtech team, caught up with a former FDA director to talk about how staffing cuts might affect the industry. In short, expect delays in approvals of new medical technologies. In particular, it seems the risk is most acute in the most cutting edge technologies, where skilled FDA staff are hard to find. Neurology and brain/computer interfaces stand out as areas of development that might slow in this market sector.

All that said, if you just can’t turn away from tariffs, we reiterate our guidance here: Tariffs are likely going up, even if the precise path is uncertain. And whether or not you’re constructive on the goals the administration is attempting to achieve, the path to achieving them carries costs and execution risk. Our U.S. economics team’s recent downgrade of the U.S. growth outlook for this and next year exemplifies this.

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/1ZFua1IY9oD0kIqsYdjL3I/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"7a59J5AfRInzOXQNyVJa5U","uri":"spotify:episode:7a59J5AfRInzOXQNyVJa5U","href":"https://api.spotify.com/v1/episodes/7a59J5AfRInzOXQNyVJa5U","name":"The AI Agents Are Here","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"Our analysts Adam Jonas and Michelle Weaver share a glimpse into the future from Morgan Stanley’s Annual Tech, Media, and Telecom (TMT) Conference, as agentic AI powers autonomous vehicles, humanoid robots and more.","duration_ms":695040,"is_playable":true,"release_date":"2025-03-11","external_urls":{"spotify":"https://open.spotify.com/episode/7a59J5AfRInzOXQNyVJa5U"},"html_description":"

Our analysts Adam Jonas and Michelle Weaver share a glimpse into the future from Morgan Stanley’s Annual Tech, Media, and Telecom (TMT) Conference, as agentic AI powers autonomous vehicles, humanoid robots and more.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/3ftU6htpzD3AlZNwpdiJCs/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"5u6J9vFXmCLwKzq9geoqBZ","uri":"spotify:episode:5u6J9vFXmCLwKzq9geoqBZ","href":"https://api.spotify.com/v1/episodes/5u6J9vFXmCLwKzq9geoqBZ","name":"Why Uncertainty Won't Slow AI Hardware Investment","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"Our Head of U.S. IT Hardware Erik Woodring gives his key takeaways from Morgan Stanley’s Technology, Media and Telecom (TMT) conference, including why there appears to be a long runway ahead for AI infrastructure spending, despite macro uncertainty. ----- Transcript -----Welcome to Thoughts on the Market. I’m Erik Woodring, Morgan Stanley’s Head of U.S. IT Hardware Research. Here are some reflections I recorded last week at Morgan Stanley’s Technology, Media, and Telecom Conference in San Francisco. It’s Monday, March 10th at 9am in New York. This was another year of record attendance at our TMT Conference. And what is clear from speaking to investors is that the demand for new, under-discovered or under-appreciated ideas is higher than ever. In a stock-pickers’ market – like the one we have now – investors are really digging into themes and single name ideas. Big picture – uncertainty was a key theme this week. Whether it’s tariffs and the changing geopolitical landscape, market volatility, or government spending, the level of relative uncertainty is elevated. That said, we are not hearing about a material change in demand for PCs, smartphones, and other technology hardware. On the enterprise side of my coverage, we are emerging from one of the most prolonged downcycles in the last 10-plus years, and what we heard from several enterprise hardware vendors and others is an expectation that most enterprise hardware markets – PCs , Servers, and Storage – return to growth this year given pent up refresh demand. This, despite the challenges of navigating the tariff situation, which is resulting in most companies raising prices to mitigate higher input costs. On the consumer side of the world, the demand environment for more discretionary products like speakers, cameras, PCs and other endpoint devices looks a bit more challenged. The recent downtick in consumer sentiment is contributing to this environment given the close correlation between sentiment and discretionary spending on consumer technology goods. Against this backdrop, the most dynamic topic of the conference remains GenerativeAI. What I’ve been hearing is a confidence that new GenAI solutions can increasingly meet the needs of market participants. They also continue to evolve rapidly and build momentum towards successful GenAI monetization. To this point, underlying infrastructure spending—on servers, storage and other data center componentry – to enable these emerging AI solutions remains robust. To put some numbers behind this, the 10 largest cloud customers are spending upwards of [$]350 billion this year in capex, which is up over 30 percent year-over-year. Keep in mind that this is coming off the strongest year of growth on record in 2024. Early indications for 2026 CapEx spending still point to growth, albeit a deceleration from 2025. And what’s even more compelling is that it’s still early days. My fireside chats this week highlighted that AI infrastructure spending from their largest and most sophisticated customers is only in the second inning, while AI investments from enterprises, down to small and mid-sized businesses, is only in the first inning, or maybe even earlier. So there appears to be a long runway ahead for AI infrastructure spending, despite the volatility we have seen in AI infrastructure stocks, which we see as an opportunity for investors. I’d just highlight that amidst the elevated market uncertainty, there is a prioritization on cost efficiencies and adopting GenAI to drive these efficiencies. Company executives from some of the major players this week all discussed near-term cost efficiency initiatives, and we expect these efforts to both help protect the bottom line and drive productivity growth amidst a quickly changing market backdrop. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.","duration_ms":243539,"is_playable":true,"release_date":"2025-03-10","external_urls":{"spotify":"https://open.spotify.com/episode/5u6J9vFXmCLwKzq9geoqBZ"},"html_description":"

Our Head of U.S. IT Hardware Erik Woodring gives his key takeaways from Morgan Stanley’s Technology, Media and Telecom (TMT) conference, including why there appears to be a long runway ahead for AI infrastructure spending, despite macro uncertainty.

----- Transcript -----

Welcome to Thoughts on the Market. I’m Erik Woodring, Morgan Stanley’s Head of U.S. IT Hardware Research.

Here are some reflections I recorded last week at Morgan Stanley’s Technology, Media, and Telecom Conference in San Francisco.

It’s Monday, March 10th at 9am in New York.

This was another year of record attendance at our TMT Conference. And what is clear from speaking to investors is that the demand for new, under-discovered or under-appreciated ideas is higher than ever. In a stock-pickers’ market – like the one we have now – investors are really digging into themes and single name ideas.

Big picture – uncertainty was a key theme this week. Whether it’s tariffs and the changing geopolitical landscape, market volatility, or government spending, the level of relative uncertainty is elevated. That said, we are not hearing about a material change in demand for PCs, smartphones, and other technology hardware.

On the enterprise side of my coverage, we are emerging from one of the most prolonged downcycles in the last 10-plus years, and what we heard from several enterprise hardware vendors and others is an expectation that most enterprise hardware markets – PCs , Servers, and Storage – return to growth this year given pent up refresh demand. This, despite the challenges of navigating the tariff situation, which is resulting in most companies raising prices to mitigate higher input costs.

On the consumer side of the world, the demand environment for more discretionary products like speakers, cameras, PCs and other endpoint devices looks a bit more challenged. The recent downtick in consumer sentiment is contributing to this environment given the close correlation between sentiment and discretionary spending on consumer technology goods.

Against this backdrop, the most dynamic topic of the conference remains GenerativeAI. What I’ve been hearing is a confidence that new GenAI solutions can increasingly meet the needs of market participants. They also continue to evolve rapidly and build momentum towards successful GenAI monetization.

To this point, underlying infrastructure spending—on servers, storage and other data center componentry – to enable these emerging AI solutions remains robust. To put some numbers behind this, the 10 largest cloud customers are spending upwards of [$]350 billion this year in capex, which is up over 30 percent year-over-year. Keep in mind that this is coming off the strongest year of growth on record in 2024. Early indications for 2026 CapEx spending still point to growth, albeit a deceleration from 2025.

And what’s even more compelling is that it’s still early days. My fireside chats this week highlighted that AI infrastructure spending from their largest and most sophisticated customers is only in the second inning, while AI investments from enterprises, down to small and mid-sized businesses, is only in the first inning, or maybe even earlier. So there appears to be a long runway ahead for AI infrastructure spending, despite the volatility we have seen in AI infrastructure stocks, which we see as an opportunity for investors.

I’d just highlight that amidst the elevated market uncertainty, there is a prioritization on cost efficiencies and adopting GenAI to drive these efficiencies. Company executives from some of the major players this week all discussed near-term cost efficiency initiatives, and we expect these efforts to both help protect the bottom line and drive productivity growth amidst a quickly changing market backdrop.

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/2mpVJDY5dRsrwbJ576FIE5/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"7KPY0RXucz5IJp1vSeaNnf","uri":"spotify:episode:7KPY0RXucz5IJp1vSeaNnf","href":"https://api.spotify.com/v1/episodes/7KPY0RXucz5IJp1vSeaNnf","name":"Rewiring Global Trade","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"While policy noise continues to dominate the headlines, our Global Head of Fixed Income Research and Public Policy Strategy Michael Zezas points out a key theme: a transition toward a multipolar world.----- Transcript -----Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income Research and Public Policy Strategy. Today we’ll be discussing what investors need to focus on amidst all the U.S. policy headlines.It’s Friday, March 7th, at 12:30 pm in New York.In recent weeks the news flow on tariffs, immigration, and geopolitics has been relentless, culminating in this week’s state of the union address by President Trump and, if headlines hold, a partial reversal in course on Mexico and Canada tariffs that were just levied earlier this week. Understandably, measures of policy uncertainty, such as the Baker, Bloom, and Davis index, have reached all time highs. And this tracks with the confusion expressed by investing and corporate clients. In our view, this policy noise is going to continue. But, there is an important signal. These developments track with one of our four key themes of 2025. The transition toward a multipolar world. The tense White House meeting between Presidents Trump and Zelensky, played out live in front of the news cameras, was another reminder that the U.S. is evolving its role in driving international affairs. And tariffs on Mexico, Canada, and China are a reminder of the U.S.’s interest in rewiring global trade. The reasons behind this are myriad and complex, but in the near term it's about the U.S. looking more inward. Economic populism is, well, popular with voters in both parties. There’s a few net takeaways for investors here. One is a positive for the European defense sector. The combination of tariffs and the evolving U.S. posture on global security has long been part of our thesis on why Europe would eventually chart a new path and step up to spend more on defense. The current situation in Russia and Ukraine underscores this, with potential for another $0.9-$2.7 trillion in defense spending through 2035. Germany’s new ‘whatever it takes’ approach to defense spending is a key signpost in this trend, per our colleagues in European economics, equities, and foreign exchange. Another critical takeaway is around the effects of U.S. trade realignment on both macro markets and equity sector preferences. Whether these trade policy changes play out well over time or not, the attempt costs something in the near term. Tariffs are part of that cost. And while the precise path of tariff increases is unclear, what is clear is that they’re headed higher in the aggregate, a tactic in service of the administration’s goal of reducing trade deficits and creating reciprocal trade barriers in order to incentivize greater production in the U.S. Over the next year, our economists expect that those tariff costs will crimp economic activity. That slower growth should eventually feed through into a more dovish monetary policy. Both factors, in the view of our U.S. rates strategy team, should continue pushing yields lower – good news for bond investors, but more challenging posture for equity investors, and a key reason our cross asset team is currently flagging a preference for fixed income. That tariff activity should also drive supply chain realignment. But, going forward, changing those supply chains may now be more costly. Per work from our Global economics team, the supply chains that need to be moved now are complex and concentrated in geopolitical rivals. That’s a challenge for certain sectors, like U.S. IT hardware and consumer discretionary. But the investment to make it happen creates demand and is a benefit for the capital goods and broader industrials sector. Bottom line, the policy noise will continue, as will the market cross currents it’s driving. We’ll keep you informed on it all here. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.","duration_ms":238236,"is_playable":true,"release_date":"2025-03-07","external_urls":{"spotify":"https://open.spotify.com/episode/7KPY0RXucz5IJp1vSeaNnf"},"html_description":"

While policy noise continues to dominate the headlines, our Global Head of Fixed Income Research and Public Policy Strategy Michael Zezas points out a key theme: a transition toward a multipolar world.

----- Transcript -----

Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income Research and Public Policy Strategy. Today we’ll be discussing what investors need to focus on amidst all the U.S. policy headlines.

It’s Friday, March 7th, at 12:30 pm in New York.

In recent weeks the news flow on tariffs, immigration, and geopolitics has been relentless, culminating in this week’s state of the union address by President Trump and, if headlines hold, a partial reversal in course on Mexico and Canada tariffs that were just levied earlier this week. Understandably, measures of policy uncertainty, such as the Baker, Bloom, and Davis index, have reached all time highs. And this tracks with the confusion expressed by investing and corporate clients.

In our view, this policy noise is going to continue. But, there is an important signal. These developments track with one of our four key themes of 2025. The transition toward a multipolar world. The tense White House meeting between Presidents Trump and Zelensky, played out live in front of the news cameras, was another reminder that the U.S. is evolving its role in driving international affairs. And tariffs on Mexico, Canada, and China are a reminder of the U.S.’s interest in rewiring global trade. The reasons behind this are myriad and complex, but in the near term it's about the U.S. looking more inward. Economic populism is, well, popular with voters in both parties.

There’s a few net takeaways for investors here. One is a positive for the European defense sector. The combination of tariffs and the evolving U.S. posture on global security has long been part of our thesis on why Europe would eventually chart a new path and step up to spend more on defense. The current situation in Russia and Ukraine underscores this, with potential for another $0.9-$2.7 trillion in defense spending through 2035. Germany’s new ‘whatever it takes’ approach to defense spending is a key signpost in this trend, per our colleagues in European economics, equities, and foreign exchange.

Another critical takeaway is around the effects of U.S. trade realignment on both macro markets and equity sector preferences. Whether these trade policy changes play out well over time or not, the attempt costs something in the near term. Tariffs are part of that cost. And while the precise path of tariff increases is unclear, what is clear is that they’re headed higher in the aggregate, a tactic in service of the administration’s goal of reducing trade deficits and creating reciprocal trade barriers in order to incentivize greater production in the U.S.

Over the next year, our economists expect that those tariff costs will crimp economic activity. That slower growth should eventually feed through into a more dovish monetary policy. Both factors, in the view of our U.S. rates strategy team, should continue pushing yields lower – good news for bond investors, but more challenging posture for equity investors, and a key reason our cross asset team is currently flagging a preference for fixed income.

That tariff activity should also drive supply chain realignment. But, going forward, changing those supply chains may now be more costly. Per work from our Global economics team, the supply chains that need to be moved now are complex and concentrated in geopolitical rivals. That’s a challenge for certain sectors, like U.S. IT hardware and consumer discretionary. But the investment to make it happen creates demand and is a benefit for the capital goods and broader industrials sector.

Bottom line, the policy noise will continue, as will the market cross currents it’s driving. We’ll keep you informed on it all here.

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/3Pw1Lj8L6lR1aNMuPILWbr/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"0VnPMCtinB8Kzv5ullz1pU","uri":"spotify:episode:0VnPMCtinB8Kzv5ullz1pU","href":"https://api.spotify.com/v1/episodes/0VnPMCtinB8Kzv5ullz1pU","name":"Funding the Next Phase of AI Development","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"Recorded at our 2025 Technology, Media and Telecom (TMT) Conference, TMT Credit Research Analyst Lindsay Tyler joins Head of Investment Grade Debt Coverage Michelle Wang to discuss the how the industry is strategically raising capital to fund growth.----- Transcript -----Lindsay Tyler: Welcome to Thoughts on the Market. I'm Lindsay Tyler, Morgan Stanley's Lead Investment Grade TMT Credit Research Analyst, and I'm here with Michelle Wang, Head of Investment Grade Debt Coverage in Global Capital Markets.On this special episode, we're recording at the Morgan Stanley Technology, Media, and Telecom (TMT) Conference, and we will discuss the latest on the technology space from the fixed income perspective.It's Thursday, March 6th at 12 pm in San Francisco.What a week it's been. Last I heard, we had over 350 companies here in attendance.To set the stage for our discussion, technology has grown from about 2 percent of the broader investment grade market – about two decades ago – to almost 10 percent now; though that is still relatively a small percentage, relative to the weightings in the equity market.So, can you address two questions? First, why was tech historically such a small part of investment grade? And then second, what has driven the growth sense?Michelle Wang: Technology is still a relatively young industry, right? I'm in my 40s and well over 90 percent of the companies that I cover were founded well within my lifetime. And if you add to that the fact that investment grade debt is, by definition, a later stage capital raising tool. When the business of these companies reaches sufficient scale and cash generation to be rated investment grade by the rating agencies, you wind up with just a small subset of the overall investment grade universe.The second question on what has been driving the growth? Twofold. Number one the organic maturation of the tech industry results in an increasing number of scaled investment grade companies. And then secondly, the increasing use of debt as a cheap source of capital to fund their growth. This could be to fund R&D or CapEx or, in some cases, M&A.Lindsay Tyler: Right, and I would just add in this context that my view for this year on technology credit is a more neutral one, and that's against a backdrop of being more cautious on the communications and media space.And part of that is just driven by the spread compression and the lack of dispersion that we see in the market. And you mentioned M&A and capital allocation; I do think that financial policy and changes there, whether it's investment, M&A, shareholder returns – that will be the main driver of credit spreads.But let's turn back to the conference and on the – you know, I mentioned investment. Let's talk about investment.AI has dominated the conversation here at the conference the past two years, and this year is no different. Morgan Stanley's research department has four key investment themes. One of those is AI and tech diffusion.But from the fixed income angle, there is that focus on ongoing and upcoming hyperscaler AI CapEx needs.Michelle Wang: Yep.Lindsay Tyler: There are significant cash flows generated by many of these companies, but we just discussed that the investment grade tech space has grown relative to the index in recent history.Can you discuss the scale of the technology CapEx that we're talking about and the related implications from your perspective?Michelle Wang: Let's actually get into some of the numbers. So in the past three years, total hyperscaler CapEx has increased from [$]125 billion three years ago to [$]220 billion today; and is expected to exceed [$]300 billion in 2027.The hyperscalers have all publicly stated that generative AI is key to their future growth aspirations. So, why are they spending all this money? They're investing heavily in the digital infrastructure to propel this growth. These companies, however, as you've pointed out, are some of the most scaled, best capitalized companies in the entire world. They have a combined market cap of [$]9 trillion. Among them, their balance sheet cash ranges from [$]70 to [$]100 billion per company. And their annual free cash flow, so the money that they generate organically, ranges from [$]30 to [$]75 billion.So they can certainly fund some of this CapEx organically. However, the unprecedented amount of spend for GenAI raises the probability that these hyperscalers could choose to raise capital externally.Lindsay Tyler: Got it.Michelle Wang: Now, how this capital is raised is where it gets really interesting. The most straightforward way to raise capital for a lot of these companies is just to do an investment grade bond deal.Lindsay Tyler: Yep.Michelle Wang: However, there are other more customized funding solutions available for them to achieve objectives like more favorable accounting or rating agency treatment, ways for them to offload some of their CapEx to a private credit firm. Even if that means that these occur at a higher cost of capital.Lindsay Tyler: You touched on private credit. I'd love to dig in there. These bespoke capital solutions.Michelle Wang: Right.Lindsay Tyler: I have seen it in the semiconductor space and telecom infrastructure, but can you please just shed some more light, right? How has this trend come to fruition? How are companies assessing the opportunity? And what are other key implications that you would flag?Michelle Wang: Yeah, for the benefit of the audience, Lindsay, I think just to touch a little bit…Lindsay Tyler: Some definitions,Michelle Wang: Yes, some definitions around ...Lindsay Tyler: Get some context.Michelle Wang: What we’re talking about.Lindsay Tyler: Yes.So the – I think what you're referring to is investment grade companies doing asset level financing. Usually in conjunction with a private credit firm, and like all financing trends that came before it, all good financing trends, this one also resulted from the serendipitous intersection of supply and demand of capital.On the supply of capital, the private credit pocket of capital driven by large pockets of insurance capital is now north of $2 trillion and it has increased 10x in scale in the past decade. So, the need to deploy these funds is driving these private credit firms to seek out ways to invest in investment grade companies in a yield enhanced manner.Lindsay Tyler: Right. And typically, we're saying 150 to 200 basis points greater than what maybe an IG bond would yield.Michelle Wang: That's exactly right. That's when it starts to get interesting for them, right? And then the demand of capital, the demand for this type of capital, that's always existed in other industries that are more asset-heavy like telcos.However, the new development of late is the demand for capital from tech due to two megatrends that we're seeing in tech. The first is semiconductors. Building these chip factories is an extremely capital-intensive exercise, so creates a demand for capital. And then the second megatrend is what we've seen with the hyperscalers and GenerativeAI needs. Building data centers and digital infrastructure for GenerativeAI is also extremely expensive, and that creates another pocket of demand for capital that private credit conveniently kinda serves a role in.Lindsay Tyler: Right.Michelle Wang: So look, think we've talked about the ways that companies are using these tools. I'm interested to get your view, Lindsay, on the investor perspective.Lindsay Tyler: Sure.Michelle Wang: How do investors think about some of these more bespoke solutions?Lindsay Tyler: I would say that with deals that have this touch of extra complexity, it does feel that investor communication and understanding is all important. And I have found that, some of these points that you're raising – whether it's the spread pickup and the insurance capital at the asset managers and also layering in ratings implications and the deal terms. I think all of that is important for investors to get more comfortable and have a better understanding of these types of deals.The last topic I do want us to address is the macro environment. This has been another key theme with the conference and with this recent earnings season, so whether it's rate moves this year, the talk of M& A, tariffs – what's your sense on how companies are viewing and assessing macro in their decision making?Michelle Wang: There are three components to how they're thinking about it.The first is the rate move. So, the fact that we're 50 to 60 basis points lower in Treasury yields in the past month, that's welcome news for any company looking to issue debt. The second thing I'll say here is about credit spreads. They remain extremely tight. Speaking to the incredible kind of resilience of the investment grade investor base. The last thing I'll talk about is, I think, the uncertainty. [Because] that's what we're hearing a ton about in all the conversations that we've had with companies that have presented here today at the conference.Lindsay Tyler: Yeah. For my perspective, also the regulatory environment around that M&A, whether or not companies will make the move to maybe be more acquisitive with the current new administration.Michelle Wang: Right, so until the dust settles on some of these issues, it's really difficult as a corporate decision maker to do things like big transformative M&A, to make a company public when you don't know what could happen both from a the market environment and, as you point out, regulatory standpoint.The thing that's interesting is that raising debt capital as an investment grade company has some counter cyclical dynamics to it. Because risk-off sentiment usually translates into lower treasury yields and more favorable cost of debt.And then the second point is when companies are risk averse it drives sometimes cash hoarding behavior, right? So, companies will raise what they call, you know, rainy day liquidity and park it on balance sheet – just to feel a little bit better about where their balance sheets are. To make sure they're in good shape…Lindsay Tyler: Yeah, deal with the maturities that they have right here in the near term.Michelle Wang: That's exactly right. So, I think as a consequence of that, you know, we do see some tailwinds for debt issuance volumes in an uncertain environment.Lindsay Tyler: Got it. Well, appreciate all your insights. This has been great. Thank you for taking the time, Michelle, to talk during such a busy week.Michelle Wang: It's great speaking with you, Lindsay.Lindsay Tyler: And thanks to everyone listening in to this special episode recorded at the Morgan Stanley TMT Conference in San Francisco. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.","duration_ms":639843,"is_playable":true,"release_date":"2025-03-06","external_urls":{"spotify":"https://open.spotify.com/episode/0VnPMCtinB8Kzv5ullz1pU"},"html_description":"

Recorded at our 2025 Technology, Media and Telecom (TMT) Conference, TMT Credit Research Analyst Lindsay Tyler joins Head of Investment Grade Debt Coverage Michelle Wang to discuss the how the industry is strategically raising capital to fund growth.

----- Transcript -----

Lindsay Tyler: Welcome to Thoughts on the Market. I'm Lindsay Tyler, Morgan Stanley's Lead Investment Grade TMT Credit Research Analyst, and I'm here with Michelle Wang, Head of Investment Grade Debt Coverage in Global Capital Markets.

On this special episode, we're recording at the Morgan Stanley Technology, Media, and Telecom (TMT) Conference, and we will discuss the latest on the technology space from the fixed income perspective.

It's Thursday, March 6th at 12 pm in San Francisco.

What a week it's been. Last I heard, we had over 350 companies here in attendance.

To set the stage for our discussion, technology has grown from about 2 percent of the broader investment grade market – about two decades ago – to almost 10 percent now; though that is still relatively a small percentage, relative to the weightings in the equity market.

So, can you address two questions? First, why was tech historically such a small part of investment grade? And then second, what has driven the growth sense?

Michelle Wang: Technology is still a relatively young industry, right? I'm in my 40s and well over 90 percent of the companies that I cover were founded well within my lifetime. And if you add to that the fact that investment grade debt is, by definition, a later stage capital raising tool. When the business of these companies reaches sufficient scale and cash generation to be rated investment grade by the rating agencies, you wind up with just a small subset of the overall investment grade universe.

The second question on what has been driving the growth? Twofold. Number one the organic maturation of the tech industry results in an increasing number of scaled investment grade companies. And then secondly, the increasing use of debt as a cheap source of capital to fund their growth. This could be to fund R&D or CapEx or, in some cases, M&A.

Lindsay Tyler: Right, and I would just add in this context that my view for this year on technology credit is a more neutral one, and that's against a backdrop of being more cautious on the communications and media space.

And part of that is just driven by the spread compression and the lack of dispersion that we see in the market. And you mentioned M&A and capital allocation; I do think that financial policy and changes there, whether it's investment, M&A, shareholder returns – that will be the main driver of credit spreads.

But let's turn back to the conference and on the – you know, I mentioned investment. Let's talk about investment.

AI has dominated the conversation here at the conference the past two years, and this year is no different. Morgan Stanley's research department has four key investment themes. One of those is AI and tech diffusion.

But from the fixed income angle, there is that focus on ongoing and upcoming hyperscaler AI CapEx needs.

Michelle Wang: Yep.

Lindsay Tyler: There are significant cash flows generated by many of these companies, but we just discussed that the investment grade tech space has grown relative to the index in recent history.

Can you discuss the scale of the technology CapEx that we're talking about and the related implications from your perspective?

Michelle Wang: Let's actually get into some of the numbers. So in the past three years, total hyperscaler CapEx has increased from [$]125 billion three years ago to [$]220 billion today; and is expected to exceed [$]300 billion in 2027.

The hyperscalers have all publicly stated that generative AI is key to their future growth aspirations. So, why are they spending all this money? They're investing heavily in the digital infrastructure to propel this growth. These companies, however, as you've pointed out, are some of the most scaled, best capitalized companies in the entire world. They have a combined market cap of [$]9 trillion. Among them, their balance sheet cash ranges from [$]70 to [$]100 billion per company. And their annual free cash flow, so the money that they generate organically, ranges from [$]30 to [$]75 billion.

So they can certainly fund some of this CapEx organically. However, the unprecedented amount of spend for GenAI raises the probability that these hyperscalers could choose to raise capital externally.

Lindsay Tyler: Got it.

Michelle Wang: Now, how this capital is raised is where it gets really interesting. The most straightforward way to raise capital for a lot of these companies is just to do an investment grade bond deal.

Lindsay Tyler: Yep.

Michelle Wang: However, there are other more customized funding solutions available for them to achieve objectives like more favorable accounting or rating agency treatment, ways for them to offload some of their CapEx to a private credit firm. Even if that means that these occur at a higher cost of capital.

Lindsay Tyler: You touched on private credit. I'd love to dig in there. These bespoke capital solutions.

Michelle Wang: Right.

Lindsay Tyler: I have seen it in the semiconductor space and telecom infrastructure, but can you please just shed some more light, right? How has this trend come to fruition? How are companies assessing the opportunity? And what are other key implications that you would flag?

Michelle Wang: Yeah, for the benefit of the audience, Lindsay, I think just to touch a little bit…

Lindsay Tyler: Some definitions,

Michelle Wang: Yes, some definitions around ...

Lindsay Tyler: Get some context.

Michelle Wang: What we’re talking about.

Lindsay Tyler: Yes.

So the – I think what you're referring to is investment grade companies doing asset level financing. Usually in conjunction with a private credit firm, and like all financing trends that came before it, all good financing trends, this one also resulted from the serendipitous intersection of supply and demand of capital.

On the supply of capital, the private credit pocket of capital driven by large pockets of insurance capital is now north of $2 trillion and it has increased 10x in scale in the past decade. So, the need to deploy these funds is driving these private credit firms to seek out ways to invest in investment grade companies in a yield enhanced manner.

Lindsay Tyler: Right. And typically, we're saying 150 to 200 basis points greater than what maybe an IG bond would yield.

Michelle Wang: That's exactly right. That's when it starts to get interesting for them, right? And then the demand of capital, the demand for this type of capital, that's always existed in other industries that are more asset-heavy like telcos.

However, the new development of late is the demand for capital from tech due to two megatrends that we're seeing in tech. The first is semiconductors. Building these chip factories is an extremely capital-intensive exercise, so creates a demand for capital. And then the second megatrend is what we've seen with the hyperscalers and GenerativeAI needs. Building data centers and digital infrastructure for GenerativeAI is also extremely expensive, and that creates another pocket of demand for capital that private credit conveniently kinda serves a role in.

Lindsay Tyler: Right.

Michelle Wang: So look, think we've talked about the ways that companies are using these tools. I'm interested to get your view, Lindsay, on the investor perspective.

Lindsay Tyler: Sure.

Michelle Wang: How do investors think about some of these more bespoke solutions?

Lindsay Tyler: I would say that with deals that have this touch of extra complexity, it does feel that investor communication and understanding is all important. And I have found that, some of these points that you're raising – whether it's the spread pickup and the insurance capital at the asset managers and also layering in ratings implications and the deal terms. I think all of that is important for investors to get more comfortable and have a better understanding of these types of deals.

The last topic I do want us to address is the macro environment. This has been another key theme with the conference and with this recent earnings season, so whether it's rate moves this year, the talk of M& A, tariffs – what's your sense on how companies are viewing and assessing macro in their decision making?

Michelle Wang: There are three components to how they're thinking about it.

The first is the rate move. So, the fact that we're 50 to 60 basis points lower in Treasury yields in the past month, that's welcome news for any company looking to issue debt. The second thing I'll say here is about credit spreads. They remain extremely tight. Speaking to the incredible kind of resilience of the investment grade investor base. The last thing I'll talk about is, I think, the uncertainty. [Because] that's what we're hearing a ton about in all the conversations that we've had with companies that have presented here today at the conference.

Lindsay Tyler: Yeah. For my perspective, also the regulatory environment around that M&A, whether or not companies will make the move to maybe be more acquisitive with the current new administration.

Michelle Wang: Right, so until the dust settles on some of these issues, it's really difficult as a corporate decision maker to do things like big transformative M&A, to make a company public when you don't know what could happen both from a the market environment and, as you point out, regulatory standpoint.

The thing that's interesting is that raising debt capital as an investment grade company has some counter cyclical dynamics to it. Because risk-off sentiment usually translates into lower treasury yields and more favorable cost of debt.

And then the second point is when companies are risk averse it drives sometimes cash hoarding behavior, right? So, companies will raise what they call, you know, rainy day liquidity and park it on balance sheet – just to feel a little bit better about where their balance sheets are. To make sure they're in good shape…

Lindsay Tyler: Yeah, deal with the maturities that they have right here in the near term.

Michelle Wang: That's exactly right. So, I think as a consequence of that, you know, we do see some tailwinds for debt issuance volumes in an uncertain environment.

Lindsay Tyler: Got it. Well, appreciate all your insights. This has been great. Thank you for taking the time, Michelle, to talk during such a busy week.

Michelle Wang: It's great speaking with you, Lindsay.

Lindsay Tyler: And thanks to everyone listening in to this special episode recorded at the Morgan Stanley TMT Conference in San Francisco. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/01agW4eK41Jvv5kbtWswSq/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"1XqZEzQf0Yv49stQxc1H23","uri":"spotify:episode:1XqZEzQf0Yv49stQxc1H23","href":"https://api.spotify.com/v1/episodes/1XqZEzQf0Yv49stQxc1H23","name":"Is There Too Much Focus on Fed’s Moves?","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"While central bank policy will always matter for markets, our Head of Corporate Credit Research Andrew Sheets explains why investors should not be worried about the number of Fed cuts in 2025.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today I’m going to talk about why the number of Fed rate cuts this year may matter less than you think.It's Wednesday, March 5th, at 2pm in London.Financial markets spend a lot of time discussing the Federal Reserve. And for good reason. The central bank of the world’s largest economy plays a central role in fighting inflation and setting interest rates. And what they’ll do this year is topical and shifting. At Morgan Stanley, our economists think that US Tariff and Immigration policy will lead the Fed to keep rates somewhat higher, for somewhat longer, than they did at the start of the year.Yet we think there may be just a little bit too much focus on just how much the Fed changes policy over the course of the year. Indeed, we’d go as far as to say that given the choice, investors should be rooting for less change, not more.To start, for all that’s happened in the world since the end of October of 2024, expectations for the Fed’s interest rate path have been remarkably stable. The US 2-year Treasury, which is a decent proxy of where the Fed’s rate will average over the next 24 months, has hovered in a very narrow range. It simply hasn’t been telling us very much; other factors have been moving markets.There’s also a pretty reasonable rule of thumb from history: stability is good. A stable Fed funds rate, almost by definition, implies a stable equilibrium that doesn’t involve overly high inflation pushing rates further up, or overly weak growth pushing them further down. The best growth in recent history, in the mid-1990s, occurred after the Fed reduced interest rates less than one-percent, and then kept them stable, at a pretty elevated rate for a pretty extended period of time.Large changes in rates, on the other hand, in either direction are a different story. Some of the markets worst losses have coincided with the largest declines in the Fed’s target rate – because those large rate cuts usually occur only when there is a large, unexpected slowing in the economy; something markets often don’t like.Meanwhile, we think the Fed also very much wants to avoid a scenario where it has to start raising rates again, given the potential confusion that this could signal after it only recently continued to lower them. And so if over the course of this year, the Fed does need to raise rates, given the very high bar we think they’ve given themselves for action – it probably suggests that something unexpected, and not in a necessarily good way, has occurred.Central bank policy will always matter for markets. But for investors, the question of whether the Fed will cut once, which is the Morgan Stanley base-case, twice, or not at all in 2025 may not matter all that much, at least for credit. Far more important is the performance of the economy, and whether big changes to tariffs or immigration policy drive big changes to growth and inflation. Those big changes, which could drive big changes in Fed policy responses, are the scenario that worries us.Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today. ","duration_ms":216502,"is_playable":true,"release_date":"2025-03-06","external_urls":{"spotify":"https://open.spotify.com/episode/1XqZEzQf0Yv49stQxc1H23"},"html_description":"

While central bank policy will always matter for markets, our Head of Corporate Credit Research Andrew Sheets explains why investors should not be worried about the number of Fed cuts in 2025.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today I’m going to talk about why the number of Fed rate cuts this year may matter less than you think.

It's Wednesday, March 5th, at 2pm in London.

Financial markets spend a lot of time discussing the Federal Reserve. And for good reason. The central bank of the world’s largest economy plays a central role in fighting inflation and setting interest rates. And what they’ll do this year is topical and shifting. At Morgan Stanley, our economists think that US Tariff and Immigration policy will lead the Fed to keep rates somewhat higher, for somewhat longer, than they did at the start of the year.

Yet we think there may be just a little bit too much focus on just how much the Fed changes policy over the course of the year. Indeed, we’d go as far as to say that given the choice, investors should be rooting for less change, not more.

To start, for all that’s happened in the world since the end of October of 2024, expectations for the Fed’s interest rate path have been remarkably stable. The US 2-year Treasury, which is a decent proxy of where the Fed’s rate will average over the next 24 months, has hovered in a very narrow range. It simply hasn’t been telling us very much; other factors have been moving markets.

There’s also a pretty reasonable rule of thumb from history: stability is good. A stable Fed funds rate, almost by definition, implies a stable equilibrium that doesn’t involve overly high inflation pushing rates further up, or overly weak growth pushing them further down. The best growth in recent history, in the mid-1990s, occurred after the Fed reduced interest rates less than one-percent, and then kept them stable, at a pretty elevated rate for a pretty extended period of time.

Large changes in rates, on the other hand, in either direction are a different story. Some of the markets worst losses have coincided with the largest declines in the Fed’s target rate – because those large rate cuts usually occur only when there is a large, unexpected slowing in the economy; something markets often don’t like.

Meanwhile, we think the Fed also very much wants to avoid a scenario where it has to start raising rates again, given the potential confusion that this could signal after it only recently continued to lower them. And so if over the course of this year, the Fed does need to raise rates, given the very high bar we think they’ve given themselves for action – it probably suggests that something unexpected, and not in a necessarily good way, has occurred.

Central bank policy will always matter for markets. But for investors, the question of whether the Fed will cut once, which is the Morgan Stanley base-case, twice, or not at all in 2025 may not matter all that much, at least for credit. Far more important is the performance of the economy, and whether big changes to tariffs or immigration policy drive big changes to growth and inflation. Those big changes, which could drive big changes in Fed policy responses, are the scenario that worries us.

Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/5Ue7a3eljvacIV01AXMCkf/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"7M68xyWypvjmJzSeJCGScb","uri":"spotify:episode:7M68xyWypvjmJzSeJCGScb","href":"https://api.spotify.com/v1/episodes/7M68xyWypvjmJzSeJCGScb","name":"What Will Tariffs Do to the U.S. Dollar?","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"Our U.S. Public Policy and Currency analysts, Ariana Salvatore and Andrew Watrous, discuss why the dollar fell at the beginning of the first Trump administration and whether it could happen again this year. ----- Transcript ----Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Morgan Stanley's U.S. Public Policy Strategist.Andrew Watrous: And I'm Andrew Watrous, G10 FX Strategist here at Morgan Stanley.Ariana Salvatore: Today, we'll focus on the U.S. dollar and how it might fare in global markets during the first year of the new Trump administration.It's Tuesday, March 4th at 10am in New York.So, Andrew, a few weeks ago, James Lord came on to talk about the foreign exchange volatility. Since then, tariffs and trade policy have been in the news. Last night at midnight, 25 percent tariffs on Mexico and Canada went into effect, in addition to 10 percent on China. So, let's set the scene for today's conversation. Is the dollar still dominant in global currency markets?Andrew Watrous: Yes, it is. The U.S. dollar is used in about $7 trillion worth of daily FX transactions. And the dollar's share of all currency transactions has been pretty stable over the last few decades. And something like 80 percent of all trade finance is invoiced in dollars, and that share has been pretty stable too.A big part of that dollar dominance is because of the depth and safety of the Treasury security market.Ariana Salvatore: That makes sense. And the dollar fell in 2017, the first year of the Trump administration. Why did that happen?Andrew Watrous: Yeah, so 2017 gets a lot of client attention because the Fed was hiking, there was a lot of uncertainty about would happen in NAFTA, and the U.S. passed a fiscally expansionary budget bill that year.So, people have asked us, ‘Why the U.S. dollar went down despite all those factors?’ And I think there are three reasons. One is that even though the possibility that the U.S. could leave NAFTA was all over the headlines that year, U.S. tariffs didn't actually go up. Another factor is that global growth turned out to be really strong in 2017, and that was helped in part by fiscal policy in China and Europe. And finally, there were some political risks in Europe that didn't end up materializing.So, investors took a sigh of relief about the possibility that I think had been priced in a bit that the Eurozone might break up. And then a lot of those factors went into reverse in 2018 and the U.S. dollar went up.Ariana Salvatore: So, applying that framework with those factors to today, is it possible that we see a repeat of 2017 in terms of the U.S. dollar decline?Andrew Watrous: Yeah, I think it's likely that the U.S. dollar continues to go lower for some of the same reasons as we saw in 2017. So, I think that compared to 2017, there's a lot more U.S. dollar positive risk premium around trade policy. So, the bar is higher for the U.S. dollar to go up just from trade headlines alone.And just like in 2017, European policy developments could be a tailwind to the euro. We've been highlighting the potential for German fiscal expansion as European defense policy comes into focus. And unlike in 2017, when the Fed was raising rates, now the Fed is probably going to cut more this year. So that's a headwind to the dollar that didn't exist back in 2017.So, on trade, Ariana. What developments do you expect? Do you think that Trump's new policies will make 2025 different in any way from 2017?Ariana Salvatore: So, taking a step back and looking at this from a very high level, a few things are different in spite of the fact that we're actually talking about a lot of similar policies. Tariffs and tax policy were a big focus in 2017 to 2019, and to be sure, this time around, they are too, but in a slightly different way.So, for example, on tax cuts, we're not talking about bringing rates lower on the individual and corporate side. We're talking about extending current policy. And on tariffs and trade policy, this round I would characterize as much broader, right? So, Trump has scoped in a broader range of trading partners into the discussion like Mexico and Canada; and is talking about a starting point that level-wise is much higher than what we saw in the whole 2018 2019 trade friction period.The highest rate back then we ever saw was 25 percent, and that was on the final batch of Chinese goods, that list four. Whereas this time, we're talking about 25 percent as a starting point for Mexico and Canada.I think sequencing is also a really important distinction. In 2017, we saw the tax cuts through the Tax Cuts and Jobs Act (TCJA) come first, followed by trade tensions in 2018 to 2019. This time around, it's really the inverse. Republicans just passed their budget resolution in the House. That lays the groundwork for the tax cut extensions.But in the meantime, Trump has been talking about tariff implementation since before he was even elected. And we've already had a number of really key trade related catalysts in the just six weeks or so that he's been in office.Andrew Watrous: So, you mentioned expectations for fiscal policy. What are recent developments there, and what do you think will happen with U.S. fiscal?Ariana Salvatore: I mentioned the budget resolution in the house that was passed last week. And you can really think of that as the starting point for the reconciliation process to kick off. And consequently, the extension of the Tax Cuts and Jobs Act.To be clear, we think that House Republicans will be able to align behind extending most of the expiring Tax Cuts and Jobs Act, but that's still in the books until the end of 2025. So, we see many months needed to kind of build this consensus among cohorts of the Republican caucus in Congress, and we already know there's some key sticking points in the discussion.What happens with the SALT [State and Local Tax] cap? What sort of clawbacks occur with the Inflation Reduction Act? All these are disagreements that right now are going to need time to work their way through Congress. So not a lot of alignment just yet. We think it's going to take most of the year to get there.But ultimately, we do see an extension of most of the TCJA, which is like I said, current law until the end of 2025.But Andrew from what I understand when it comes to fiscal policy, there are really two stages in terms of the market impact that we saw in the last administration. Can you walk us through those?Andrew Watrous: Yeah, so one lesson from 2016 to 2018 is that there were really two stages of when fiscal developments boosted the dollar. The first was right after the U.S. election in 2016, and the second was much later after the Tax Cuts and Jobs Act passed. So right after the 2016 election, within a couple of weeks, the dollar index rallied from 98 up to 103, and 10-year Treasury yields rose as well.And then things sort of moved sideways in between these two stages. Ten-year Treasury yield just moved sideways. Fiscal wasn't as supportive to the U.S. dollar. And as we know, the dollar went down. And then we had the second stage more than a year later. So, the TCJA was passed in December 2017. And then the dollar rallied after that along with the rise in Treasury yield.So, we think that now, what we've seen is actually very similar to what happened in 2017, where the dollar and yields moved a lot after the 2024 election; but now the budget reconciliation process probably won't be a tailwind to the dollar until after a tax cuts extension passes Congress. And as you mentioned, that's not going to be for many, many months. So, in the interim, we think there's a lot of room for the dollar to go down.Ariana Salvatore: And just to level set our expectations there to your point, it is probably going to be later this year. House Republicans have to align on a number of key sticking points. So, we have passage somewhere on the third or fourth quarter of 2025.But when we think about the fiscal picture, aside from the deficit and the macro impacts, a really key component is going to be what these tax changes mean for the equity market. The extension of certain tax policies will matter more for certain sectors versus others. For example, we know that extending some of the corporate provisions, aside from the lower rate, will have an impact across domestically oriented industries like industrials, healthcare, and telecom.But Andrew, to bring it back to this discussion, I want to think a little bit more about how we can loop in our expectations for the equity market and map that to certain dollar outcomes. How do you think that this as a barometer has changed, if at all, from Trump's first term?Andrew Watrous: Yeah, currency strategists like me love talking about yield differentials. But from 2016 to 2018, the U.S. dollar did not trade in line with yield differentials. Instead, in the initial years of President Trump's first term, equities were a much better barometer than interest rates for where the U.S. dollar would go.After President Trump was elected in 2016, U.S. stocks really outperformed stocks in the rest of the world, and the U.S. dollar went up. Then in 2017, stocks outside the U.S. caught up to the move in U.S. stocks, and the U.S. dollar fell. Then in 2018, all that went into reverse, and U.S. stocks started outperforming again, and the U.S. dollar went up.So, what we've been seeing in stocks today really echoes 2017, not 2018. Stocks outside the U.S. have caught up to the post election rise in U.S. stocks. And so, just like it did in 2017, we think that the U.S. dollar will decline to catch up to that move in relative stock indices.Ariana Salvatore: Finally, Andrew, we already discussed the U.S. dollar negative drivers from 2017. But what happened to these drivers the following year in 2018? And is that any indication for what might happen in 2026?Andrew Watrous: So 2018, as you mentioned, does offer a blueprint for how the U.S. dollar could go up. So, for example, if trade tensions evolve in a direction where our economists would have to significantly downwardly revise their global growth forecasts, then the U.S. dollar could start to look more attractive as a safe haven. And in 2018, there was a big rise in long-end Treasury yields. That's not what we're calling for; but if that were to happen, then the U.S. dollar could catch a bid.Ariana Salvatore: Andrew, thanks for taking the time to talk.Andrew Watrous: Great speaking with you, Ariana.Ariana Salvatore: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.","duration_ms":606746,"is_playable":true,"release_date":"2025-03-04","external_urls":{"spotify":"https://open.spotify.com/episode/7M68xyWypvjmJzSeJCGScb"},"html_description":"

Our U.S. Public Policy and Currency analysts, Ariana Salvatore and Andrew Watrous, discuss why the dollar fell at the beginning of the first Trump administration and whether it could happen again this year.

----- Transcript ----

Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Morgan Stanley's U.S. Public Policy Strategist.

Andrew Watrous: And I'm Andrew Watrous, G10 FX Strategist here at Morgan Stanley.

Ariana Salvatore: Today, we'll focus on the U.S. dollar and how it might fare in global markets during the first year of the new Trump administration.

It's Tuesday, March 4th at 10am in New York.

So, Andrew, a few weeks ago, James Lord came on to talk about the foreign exchange volatility. Since then, tariffs and trade policy have been in the news. Last night at midnight, 25 percent tariffs on Mexico and Canada went into effect, in addition to 10 percent on China. So, let's set the scene for today's conversation. Is the dollar still dominant in global currency markets?

Andrew Watrous: Yes, it is. The U.S. dollar is used in about $7 trillion worth of daily FX transactions. And the dollar's share of all currency transactions has been pretty stable over the last few decades. And something like 80 percent of all trade finance is invoiced in dollars, and that share has been pretty stable too.

A big part of that dollar dominance is because of the depth and safety of the Treasury security market.

Ariana Salvatore: That makes sense. And the dollar fell in 2017, the first year of the Trump administration. Why did that happen?

Andrew Watrous: Yeah, so 2017 gets a lot of client attention because the Fed was hiking, there was a lot of uncertainty about would happen in NAFTA, and the U.S. passed a fiscally expansionary budget bill that year.

So, people have asked us, ‘Why the U.S. dollar went down despite all those factors?’ And I think there are three reasons. One is that even though the possibility that the U.S. could leave NAFTA was all over the headlines that year, U.S. tariffs didn't actually go up. Another factor is that global growth turned out to be really strong in 2017, and that was helped in part by fiscal policy in China and Europe. And finally, there were some political risks in Europe that didn't end up materializing.

So, investors took a sigh of relief about the possibility that I think had been priced in a bit that the Eurozone might break up. And then a lot of those factors went into reverse in 2018 and the U.S. dollar went up.

Ariana Salvatore: So, applying that framework with those factors to today, is it possible that we see a repeat of 2017 in terms of the U.S. dollar decline?

Andrew Watrous: Yeah, I think it's likely that the U.S. dollar continues to go lower for some of the same reasons as we saw in 2017. So, I think that compared to 2017, there's a lot more U.S. dollar positive risk premium around trade policy. So, the bar is higher for the U.S. dollar to go up just from trade headlines alone.

And just like in 2017, European policy developments could be a tailwind to the euro. We've been highlighting the potential for German fiscal expansion as European defense policy comes into focus. And unlike in 2017, when the Fed was raising rates, now the Fed is probably going to cut more this year. So that's a headwind to the dollar that didn't exist back in 2017.

So, on trade, Ariana. What developments do you expect? Do you think that Trump's new policies will make 2025 different in any way from 2017?

Ariana Salvatore: So, taking a step back and looking at this from a very high level, a few things are different in spite of the fact that we're actually talking about a lot of similar policies. Tariffs and tax policy were a big focus in 2017 to 2019, and to be sure, this time around, they are too, but in a slightly different way.

So, for example, on tax cuts, we're not talking about bringing rates lower on the individual and corporate side. We're talking about extending current policy. And on tariffs and trade policy, this round I would characterize as much broader, right? So, Trump has scoped in a broader range of trading partners into the discussion like Mexico and Canada; and is talking about a starting point that level-wise is much higher than what we saw in the whole 2018 2019 trade friction period.

The highest rate back then we ever saw was 25 percent, and that was on the final batch of Chinese goods, that list four. Whereas this time, we're talking about 25 percent as a starting point for Mexico and Canada.

I think sequencing is also a really important distinction. In 2017, we saw the tax cuts through the Tax Cuts and Jobs Act (TCJA) come first, followed by trade tensions in 2018 to 2019. This time around, it's really the inverse. Republicans just passed their budget resolution in the House. That lays the groundwork for the tax cut extensions.

But in the meantime, Trump has been talking about tariff implementation since before he was even elected. And we've already had a number of really key trade related catalysts in the just six weeks or so that he's been in office.

Andrew Watrous: So, you mentioned expectations for fiscal policy. What are recent developments there, and what do you think will happen with U.S. fiscal?

Ariana Salvatore: I mentioned the budget resolution in the house that was passed last week. And you can really think of that as the starting point for the reconciliation process to kick off. And consequently, the extension of the Tax Cuts and Jobs Act.

To be clear, we think that House Republicans will be able to align behind extending most of the expiring Tax Cuts and Jobs Act, but that's still in the books until the end of 2025. So, we see many months needed to kind of build this consensus among cohorts of the Republican caucus in Congress, and we already know there's some key sticking points in the discussion.

What happens with the SALT [State and Local Tax] cap? What sort of clawbacks occur with the Inflation Reduction Act? All these are disagreements that right now are going to need time to work their way through Congress. So not a lot of alignment just yet. We think it's going to take most of the year to get there.

But ultimately, we do see an extension of most of the TCJA, which is like I said, current law until the end of 2025.

But Andrew from what I understand when it comes to fiscal policy, there are really two stages in terms of the market impact that we saw in the last administration. Can you walk us through those?

Andrew Watrous: Yeah, so one lesson from 2016 to 2018 is that there were really two stages of when fiscal developments boosted the dollar. The first was right after the U.S. election in 2016, and the second was much later after the Tax Cuts and Jobs Act passed. So right after the 2016 election, within a couple of weeks, the dollar index rallied from 98 up to 103, and 10-year Treasury yields rose as well.

And then things sort of moved sideways in between these two stages. Ten-year Treasury yield just moved sideways. Fiscal wasn't as supportive to the U.S. dollar. And as we know, the dollar went down. And then we had the second stage more than a year later. So, the TCJA was passed in December 2017. And then the dollar rallied after that along with the rise in Treasury yield.

So, we think that now, what we've seen is actually very similar to what happened in 2017, where the dollar and yields moved a lot after the 2024 election; but now the budget reconciliation process probably won't be a tailwind to the dollar until after a tax cuts extension passes Congress. And as you mentioned, that's not going to be for many, many months. So, in the interim, we think there's a lot of room for the dollar to go down.

Ariana Salvatore: And just to level set our expectations there to your point, it is probably going to be later this year. House Republicans have to align on a number of key sticking points. So, we have passage somewhere on the third or fourth quarter of 2025.

But when we think about the fiscal picture, aside from the deficit and the macro impacts, a really key component is going to be what these tax changes mean for the equity market. The extension of certain tax policies will matter more for certain sectors versus others. For example, we know that extending some of the corporate provisions, aside from the lower rate, will have an impact across domestically oriented industries like industrials, healthcare, and telecom.

But Andrew, to bring it back to this discussion, I want to think a little bit more about how we can loop in our expectations for the equity market and map that to certain dollar outcomes. How do you think that this as a barometer has changed, if at all, from Trump's first term?

Andrew Watrous: Yeah, currency strategists like me love talking about yield differentials. But from 2016 to 2018, the U.S. dollar did not trade in line with yield differentials. Instead, in the initial years of President Trump's first term, equities were a much better barometer than interest rates for where the U.S. dollar would go.

After President Trump was elected in 2016, U.S. stocks really outperformed stocks in the rest of the world, and the U.S. dollar went up. Then in 2017, stocks outside the U.S. caught up to the move in U.S. stocks, and the U.S. dollar fell. Then in 2018, all that went into reverse, and U.S. stocks started outperforming again, and the U.S. dollar went up.

So, what we've been seeing in stocks today really echoes 2017, not 2018. Stocks outside the U.S. have caught up to the post election rise in U.S. stocks. And so, just like it did in 2017, we think that the U.S. dollar will decline to catch up to that move in relative stock indices.

Ariana Salvatore: Finally, Andrew, we already discussed the U.S. dollar negative drivers from 2017. But what happened to these drivers the following year in 2018? And is that any indication for what might happen in 2026?

Andrew Watrous: So 2018, as you mentioned, does offer a blueprint for how the U.S. dollar could go up. So, for example, if trade tensions evolve in a direction where our economists would have to significantly downwardly revise their global growth forecasts, then the U.S. dollar could start to look more attractive as a safe haven. And in 2018, there was a big rise in long-end Treasury yields. That's not what we're calling for; but if that were to happen, then the U.S. dollar could catch a bid.

Ariana Salvatore: Andrew, thanks for taking the time to talk.

Andrew Watrous: Great speaking with you, Ariana.

Ariana Salvatore: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/33lTWXCl2flMqREYNHzDTh/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"},{"id":"2fHyiW8Ip08T2HXqSLaZyB","uri":"spotify:episode:2fHyiW8Ip08T2HXqSLaZyB","href":"https://api.spotify.com/v1/episodes/2fHyiW8Ip08T2HXqSLaZyB","name":"Will GenAI Turn a Profit in 2025?","type":"episode","images":[{"url":"https://i.scdn.co/image/ab6765630000ba8a26bcd4222cf34a30571d0625","width":640,"height":640},{"url":"https://i.scdn.co/image/ab67656300005f1f26bcd4222cf34a30571d0625","width":300,"height":300},{"url":"https://i.scdn.co/image/ab6765630000f68d26bcd4222cf34a30571d0625","width":64,"height":64}],"explicit":false,"language":"en","languages":["en"],"description":"Our Semiconductors and Software analysts Joe Moore and Keith Weiss dive into the biggest market debate around AI and why it’s likely to shape conversations at Morgan Stanley’s Technology, Media and Telecom (TMT) Conference in San Francisco. ----- Transcript -----Joe Moore: Welcome to Thoughts on the Market. I'm Joe Moore, Morgan Stanley's Head of U.S. Semiconductors.Keith Weiss: And I'm Keith Weiss, Head of U.S. Software.Joe Moore: Today on the show, one of the biggest market debates in the tech sector has been around AI and the Return On Investment, or ROI. In fact, we think this will be the number one topic of conversation at Morgan Stanley's annual Technology, Media and Telecom (TMT) conference in San Francisco.And that's precisely where we're bringing you this episode from.It's Monday, March 3rd, 7am in San Francisco.So, let's get right into it. ChatGPT was released November 2022. Since then, the biggest tech players have gained more than $9 trillion in combined market capitalization. They're up more than double the amount of the S&P 500 index. And there's a lot of investor expectation for a new technology cycle centered around AI. And that's what's driving a lot of this momentum.You know, that said, there's also a significant investor concern around this topic of ROI, especially given the unprecedented level of investment that we've seen and sparse data points still on the returns.So where are we now? Is 2025 going to be a year when the ROI and GenAI finally turns positive?Keith Weiss: If we take a step back and think about the staging of how innovation cycles tend to play out, I think it's a helpful context.And it starts with research. I would say the period up until When ChatGPT was released – up until that November 2022 – was a period of where the fundamental research was being done on the transformer models; utilizing, machine learning. And what fundamental research is, is trying to figure out if these fundamental capabilities are realistic. If we can do this in software, if you will.And with the release of ChatGPT, it was a very strong, uh, stamp of approval of ‘Yes, like these transformer models can work.’Then you start stage two. And I think that's basically November 22 through where are today of, where you have two tracks going on. One is development. So these large language models, they can do natural language processing well.They can contextually understand unstructured and semi structured data. They can generate content. They could create text; they could create images and videos.So, there's these fundamental capabilities. But you have to develop a product to get work done. How are we going to utilize those capabilities? So, we've been working on development of product over the past two years. And at the same time, we've been scaling out the infrastructure for that product development.And now, heading into 2025, I think we're ready to go into the next stage of the innovation cycle, which will be market uptake.And that's when revenue starts to flow to the software companies that are trying to automate business processes. We definitely think that monetization starts to ramp in 2025, which should prove out a better ROI or start to prove out the ROI of all this investment that we've been making.Joe Moore: Morgan Stanley Research projects that GenAI can potentially drive a $1.1 trillion dollar revenue opportunity in 2028, up from $45 billion in 2024. Can you break this down for our listeners?Keith Weiss: We recently put out a report where we tried to size kind of what the revenue generation capability is from GenerativeAI, because that's an important part of this ROI equation. You have the return on the top of where you could actually monetize this. On the bottom, obviously, investment. And we took a look at all the investment needed to serve this type of functionality.The [$]1.1 trillion, if you will, it breaks down into two big components. Um, One side of the equation is in my backyard, and that's the enterprise software side of the equation. It's about a third of that number. And what we see occurring is the automation of more and more of the work being done by information workers; for people in overall.And what we see is about 25 percent, of overall labor being impacted today. And we see that growing to over 45 percent over the next three years.So, what that's going to look like from a software perspective is a[n] opportunity ramping up to about, just about $400 billion of software opportunity by 2028. At that point, GenerativeAI will represent about 22 percent of overall software spending. At that point, the overall software market we expect to be about a $1.8 trillion market.The other side of the equation, the bigger side of the equation, is actually the consumer platforms. And that kind of makes sense if you think about the broader economy, it's basically one-third B2B, two-thirds B2C. The automation is relatively equivalent on both sides of the equation.Joe Moore: So, let's drill further into your outlook for software. What are the biggest catalysts you expect to see this year, and then over the coming three years?Keith Weiss: The key catalyst for this year is proving out the efficacy of these solutions, right?Proving out that they're going to drive productivity gains and yield real hard dollar ROI for the end customer. And I think where we'll see that is from labor savings.Once that occurs, and I think it's going to be over the next 12 to 18 months, then we go into the period of mainstream adoption. You need to start utilizing these technologies to drive the efficiencies within your businesses to be able to keep up with your competitors. So, that's the main thing that we're looking for in the near term.Over the next three years, what you're looking for is the breakthrough technologies. Where can we find opportunities not just to create efficiencies within existing processes, but to completely rewrite the business process.That's where you see new big companies emerge within the software opportunity – is the people that really fundamentally change the equation around some of these processes.So, Joe, turning it over to you, hardware remains a bottleneck for AI innovation. Why is that the case? And what are the biggest hurdles in the semiconductor space right now?Joe Moore: Well, this has proven to be an extremely computationally intensive application, and I think it started with training – where you started seeing tens of thousands of GPUs or XPUS clustered together to train these big models, these Large Language Models. And you started hearing comments two years ago around the development of ChatGPT that, you know, the scaling laws are tricky.You might need five times as much hardware to make a model that's 10 percent smarter. But the challenge of making a model that's 10 percent smarter, the table stakes of that are very significant. And so, you see, you know, those investments continuing to scale up. And that's been a big debate for the market.But we've heard from most of the big spenders in the market that we are continuing to scale up training. And then after that happened, we started seeing inference suddenly as a big user of advanced processors, GPUs, in a way that they hadn't before. And that was sort of simple conversational types of AI.Now as you start migrating into more of a reasoning AI, a multi pass approach, you're looking at a really dramatic scaling in the amount of hardware, that's required from both GPUs and XPUs.And at the same time the hardware companies are focused a lot on how do we deliver that – so that it doesn't become prohibitively expensive; which it is very expensive. But there's a lot of improvement. And that's where you're sort of seeing this tug of war in the stocks; that when you see something that's deflationary, uh, it becomes a big negative. But the reality is the hardware is designed to be deflationary because the workloads themselves are inflationary.And so I think there's a lot of growth still ahead of us. A lot of investment, and a lot of rich debate in the market about this.Keith Weiss: Let's pull on that thread a little bit. You talked initially about the scaling of the GPU clusters to support training. Over the past year, we've gotten a little bit more pushback on the ideas or the efficacy of those scaling laws.They've come more under question. And at the same time, we've seen the availability of some lower cost, but still very high-performance models. Is this going to reshape the investments from the large semiconductor players in terms of how they're looking to address the market?Joe Moore: I think we have to assess that over time. Right now, there are very clear comments from everybody who's in charge of scaling large models that they intend to continue to scale.I think there is a benefit to doing so from the standpoint of creating a richer model, but is the ROI there? You know, and that's where I think, you know, your numbers do a very good job of justifying our model for our core companies – where we can say, okay, this is not a bubble. This is investment that's driven by these areas of economic benefit that our software and internet teams are seeing.And I think there is a bit of an arms race at the high end of the market where people just want to have the biggest cluster. And that's, we think that's about 30 percent of the revenue right now in hardware – is supporting those really big models. But we're also seeing, to your point, a very rich hardware configuration on the inference side post training model customization. Nvidia said on their on their earnings call recently that they see several orders of magnitude more compute required for those applications than for that pre-training. So, I think over time that's where the growth is going to come from.But you know, right now we're seeing growth really from all aspects of the market.Keith Weiss: Got it. So, a lot of really big opportunities out there utilizing these GPUs and ASICs, but also a lot of unknowns and potential risks. So, what are the key catalysts that you're looking for in the semiconductor space over the course of this year and maybe over the next three years?Joe Moore: Well, 2025 is, is a year that is really mostly about supply.You know, we're ramping up, new hardware But also, several companies doing custom silicon. We have to ramp all that hardware up and it's very complicated.It uses every kind of trick and technique that semiconductors use to do advanced packaging and things like that. And so, it's a very challenging supply chain and it has been for two years. And fortunately, it's happened in a time when there's plenty of semiconductor capacity out there.But I think, you know, we're ramping very quickly. And I think what you're seeing is the things that matter this year are gonna be more about how quickly we can get that supply, what are the gross margins on hardware, things like that.I think beyond that, we have to really get a sense of, you know, these ROI questions are really important beyond 2025. Because again, this is not a bubble. But hardware is cyclical and there; it doesn't slow gracefully. So, there will be periods where investment may fall off and it'll be a difficult time to own the stocks. And that's, you know, we do think that over time, the value sort of transitions from hardware to software.But we model for 2026 to be a year where it starts to slow down a little bit. We start to see some consolidation in these investments.Now, 12 months ago, I thought that about 2025. So, the timeframe keeps getting pushed out. It remains very robust. But I think at some point it will plateau a little bit and we'll start to see some fragmentation; and we'll start to see markets like, you know, reasoning models, inference models becoming more and more critical. But that's where when I hear you and Brian Nowak talking about sort of the early stage that we are of actually implementing this stuff, that inference has a long way to go in terms of growth.So, we're optimistic around the whole AI space for semiconductors. Obviously, the market is as well. So, there's expectations, challenges there. But there's still a lot of growth ahead of us.So Keith, looking towards the future, as AI expands the functionality of software, how will that transform the business models of your companies?Keith Weiss: We're also fundamentally optimistic about software and what GenerativeAI means for the overall software industry.If we look at software companies today, particularly application companies, a lot of what you're trying to do is make information workers more productive. So, it made a lot of sense to price based upon the number of people who are using your software. Or you've got a lot of seat-based models.Now we're talking about completely automating some of those processes, taking people out of the loop altogether. You have to price differently. You have to price based upon the number of transactions you're running, or some type of consumptive element of the amount of work that you're getting done. I think the other thing that we're going to see is the market opportunity expanding well beyond information workers.So, the way that we count the value, the way that we accrue the value might change a little bit. But the underlying value proposition remains the same. It's about automating, creating productivity in those business processes, and then the software companies pricing for their fair share of that productivity.Joe Moore: Great. Well, let me just say this has been a really useful process for me. The collaboration between our teams is really helpful because as a semiconductor analyst, you can see the data points, you can see the hardware being built. And I know the enthusiasm that people have on a tactical level. But understanding where the returns are going to come from and what milestones we need to watch to see any potential course correction is very valuable.So on that note, it's time for us to get to the exciting panels at the Morgan Stanley TMT conference. Uh, And we'll have more from the conference on the show later this week. Keith, thanks for taking the time to talk.Keith Weiss: Great speaking with you, Joe.Joe Moore: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.","duration_ms":769619,"is_playable":true,"release_date":"2025-03-03","external_urls":{"spotify":"https://open.spotify.com/episode/2fHyiW8Ip08T2HXqSLaZyB"},"html_description":"

Our Semiconductors and Software analysts Joe Moore and Keith Weiss dive into the biggest market debate around AI and why it’s likely to shape conversations at Morgan Stanley’s Technology, Media and Telecom (TMT) Conference in San Francisco.

----- Transcript -----

Joe Moore: Welcome to Thoughts on the Market. I'm Joe Moore, Morgan Stanley's Head of U.S. Semiconductors.

Keith Weiss: And I'm Keith Weiss, Head of U.S. Software.

Joe Moore: Today on the show, one of the biggest market debates in the tech sector has been around AI and the Return On Investment, or ROI. In fact, we think this will be the number one topic of conversation at Morgan Stanley's annual Technology, Media and Telecom (TMT) conference in San Francisco.

And that's precisely where we're bringing you this episode from.

It's Monday, March 3rd, 7am in San Francisco.

So, let's get right into it. ChatGPT was released November 2022. Since then, the biggest tech players have gained more than $9 trillion in combined market capitalization. They're up more than double the amount of the S&P 500 index. And there's a lot of investor expectation for a new technology cycle centered around AI. And that's what's driving a lot of this momentum.

You know, that said, there's also a significant investor concern around this topic of ROI, especially given the unprecedented level of investment that we've seen and sparse data points still on the returns.

So where are we now? Is 2025 going to be a year when the ROI and GenAI finally turns positive?

Keith Weiss: If we take a step back and think about the staging of how innovation cycles tend to play out, I think it's a helpful context.

And it starts with research. I would say the period up until When ChatGPT was released – up until that November 2022 – was a period of where the fundamental research was being done on the transformer models; utilizing, machine learning. And what fundamental research is, is trying to figure out if these fundamental capabilities are realistic. If we can do this in software, if you will.

And with the release of ChatGPT, it was a very strong, uh, stamp of approval of ‘Yes, like these transformer models can work.’

Then you start stage two. And I think that's basically November 22 through where are today of, where you have two tracks going on. One is development. So these large language models, they can do natural language processing well.

They can contextually understand unstructured and semi structured data. They can generate content. They could create text; they could create images and videos.

So, there's these fundamental capabilities. But you have to develop a product to get work done. How are we going to utilize those capabilities? So, we've been working on development of product over the past two years. And at the same time, we've been scaling out the infrastructure for that product development.

And now, heading into 2025, I think we're ready to go into the next stage of the innovation cycle, which will be market uptake.

And that's when revenue starts to flow to the software companies that are trying to automate business processes. We definitely think that monetization starts to ramp in 2025, which should prove out a better ROI or start to prove out the ROI of all this investment that we've been making.

Joe Moore: Morgan Stanley Research projects that GenAI can potentially drive a $1.1 trillion dollar revenue opportunity in 2028, up from $45 billion in 2024. Can you break this down for our listeners?

Keith Weiss: We recently put out a report where we tried to size kind of what the revenue generation capability is from GenerativeAI, because that's an important part of this ROI equation. You have the return on the top of where you could actually monetize this. On the bottom, obviously, investment. And we took a look at all the investment needed to serve this type of functionality.

The [$]1.1 trillion, if you will, it breaks down into two big components. Um, One side of the equation is in my backyard, and that's the enterprise software side of the equation. It's about a third of that number. And what we see occurring is the automation of more and more of the work being done by information workers; for people in overall.

And what we see is about 25 percent, of overall labor being impacted today. And we see that growing to over 45 percent over the next three years.

So, what that's going to look like from a software perspective is a[n] opportunity ramping up to about, just about $400 billion of software opportunity by 2028. At that point, GenerativeAI will represent about 22 percent of overall software spending. At that point, the overall software market we expect to be about a $1.8 trillion market.

The other side of the equation, the bigger side of the equation, is actually the consumer platforms. And that kind of makes sense if you think about the broader economy, it's basically one-third B2B, two-thirds B2C. The automation is relatively equivalent on both sides of the equation.

Joe Moore: So, let's drill further into your outlook for software. What are the biggest catalysts you expect to see this year, and then over the coming three years?

Keith Weiss: The key catalyst for this year is proving out the efficacy of these solutions, right?

Proving out that they're going to drive productivity gains and yield real hard dollar ROI for the end customer. And I think where we'll see that is from labor savings.

Once that occurs, and I think it's going to be over the next 12 to 18 months, then we go into the period of mainstream adoption. You need to start utilizing these technologies to drive the efficiencies within your businesses to be able to keep up with your competitors. So, that's the main thing that we're looking for in the near term.

Over the next three years, what you're looking for is the breakthrough technologies. Where can we find opportunities not just to create efficiencies within existing processes, but to completely rewrite the business process.

That's where you see new big companies emerge within the software opportunity – is the people that really fundamentally change the equation around some of these processes.

So, Joe, turning it over to you, hardware remains a bottleneck for AI innovation. Why is that the case? And what are the biggest hurdles in the semiconductor space right now?

Joe Moore: Well, this has proven to be an extremely computationally intensive application, and I think it started with training – where you started seeing tens of thousands of GPUs or XPUS clustered together to train these big models, these Large Language Models. And you started hearing comments two years ago around the development of ChatGPT that, you know, the scaling laws are tricky.

You might need five times as much hardware to make a model that's 10 percent smarter. But the challenge of making a model that's 10 percent smarter, the table stakes of that are very significant. And so, you see, you know, those investments continuing to scale up. And that's been a big debate for the market.

But we've heard from most of the big spenders in the market that we are continuing to scale up training. And then after that happened, we started seeing inference suddenly as a big user of advanced processors, GPUs, in a way that they hadn't before. And that was sort of simple conversational types of AI.

Now as you start migrating into more of a reasoning AI, a multi pass approach, you're looking at a really dramatic scaling in the amount of hardware, that's required from both GPUs and XPUs.

And at the same time the hardware companies are focused a lot on how do we deliver that – so that it doesn't become prohibitively expensive; which it is very expensive. But there's a lot of improvement. And that's where you're sort of seeing this tug of war in the stocks; that when you see something that's deflationary, uh, it becomes a big negative. But the reality is the hardware is designed to be deflationary because the workloads themselves are inflationary.

And so I think there's a lot of growth still ahead of us. A lot of investment, and a lot of rich debate in the market about this.

Keith Weiss: Let's pull on that thread a little bit. You talked initially about the scaling of the GPU clusters to support training. Over the past year, we've gotten a little bit more pushback on the ideas or the efficacy of those scaling laws.

They've come more under question. And at the same time, we've seen the availability of some lower cost, but still very high-performance models. Is this going to reshape the investments from the large semiconductor players in terms of how they're looking to address the market?

Joe Moore: I think we have to assess that over time. Right now, there are very clear comments from everybody who's in charge of scaling large models that they intend to continue to scale.

I think there is a benefit to doing so from the standpoint of creating a richer model, but is the ROI there? You know, and that's where I think, you know, your numbers do a very good job of justifying our model for our core companies – where we can say, okay, this is not a bubble. This is investment that's driven by these areas of economic benefit that our software and internet teams are seeing.

And I think there is a bit of an arms race at the high end of the market where people just want to have the biggest cluster. And that's, we think that's about 30 percent of the revenue right now in hardware – is supporting those really big models. But we're also seeing, to your point, a very rich hardware configuration on the inference side post training model customization. Nvidia said on their on their earnings call recently that they see several orders of magnitude more compute required for those applications than for that pre-training. So, I think over time that's where the growth is going to come from.

But you know, right now we're seeing growth really from all aspects of the market.

Keith Weiss: Got it. So, a lot of really big opportunities out there utilizing these GPUs and ASICs, but also a lot of unknowns and potential risks. So, what are the key catalysts that you're looking for in the semiconductor space over the course of this year and maybe over the next three years?

Joe Moore: Well, 2025 is, is a year that is really mostly about supply.

You know, we're ramping up, new hardware But also, several companies doing custom silicon. We have to ramp all that hardware up and it's very complicated.

It uses every kind of trick and technique that semiconductors use to do advanced packaging and things like that. And so, it's a very challenging supply chain and it has been for two years. And fortunately, it's happened in a time when there's plenty of semiconductor capacity out there.

But I think, you know, we're ramping very quickly. And I think what you're seeing is the things that matter this year are gonna be more about how quickly we can get that supply, what are the gross margins on hardware, things like that.

I think beyond that, we have to really get a sense of, you know, these ROI questions are really important beyond 2025. Because again, this is not a bubble. But hardware is cyclical and there; it doesn't slow gracefully. So, there will be periods where investment may fall off and it'll be a difficult time to own the stocks. And that's, you know, we do think that over time, the value sort of transitions from hardware to software.

But we model for 2026 to be a year where it starts to slow down a little bit. We start to see some consolidation in these investments.

Now, 12 months ago, I thought that about 2025. So, the timeframe keeps getting pushed out. It remains very robust. But I think at some point it will plateau a little bit and we'll start to see some fragmentation; and we'll start to see markets like, you know, reasoning models, inference models becoming more and more critical. But that's where when I hear you and Brian Nowak talking about sort of the early stage that we are of actually implementing this stuff, that inference has a long way to go in terms of growth.

So, we're optimistic around the whole AI space for semiconductors. Obviously, the market is as well. So, there's expectations, challenges there. But there's still a lot of growth ahead of us.

So Keith, looking towards the future, as AI expands the functionality of software, how will that transform the business models of your companies?

Keith Weiss: We're also fundamentally optimistic about software and what GenerativeAI means for the overall software industry.

If we look at software companies today, particularly application companies, a lot of what you're trying to do is make information workers more productive. So, it made a lot of sense to price based upon the number of people who are using your software. Or you've got a lot of seat-based models.

Now we're talking about completely automating some of those processes, taking people out of the loop altogether. You have to price differently. You have to price based upon the number of transactions you're running, or some type of consumptive element of the amount of work that you're getting done. I think the other thing that we're going to see is the market opportunity expanding well beyond information workers.

So, the way that we count the value, the way that we accrue the value might change a little bit. But the underlying value proposition remains the same. It's about automating, creating productivity in those business processes, and then the software companies pricing for their fair share of that productivity.

Joe Moore: Great. Well, let me just say this has been a really useful process for me. The collaboration between our teams is really helpful because as a semiconductor analyst, you can see the data points, you can see the hardware being built. And I know the enthusiasm that people have on a tactical level. But understanding where the returns are going to come from and what milestones we need to watch to see any potential course correction is very valuable.

So on that note, it's time for us to get to the exciting panels at the Morgan Stanley TMT conference. Uh, And we'll have more from the conference on the show later this week. Keith, thanks for taking the time to talk.

Keith Weiss: Great speaking with you, Joe.

Joe Moore: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

","audio_preview_url":"https://podz-content.spotifycdn.com/audio/clips/7mcaz4WLLBUgzN8GL0yNFY/clip_0_60000.mp3","is_externally_hosted":true,"release_date_precision":"day"}],"limit":50,"total":1345,"offset":0,"previous":null},"explicit":false,"languages":["en"],"publisher":"Morgan Stanley","copyrights":[],"media_type":"audio","description":"Short, thoughtful and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.","external_urls":{"spotify":"https://open.spotify.com/show/5cOfqdkomvzyhPTR7n6KFa"},"total_episodes":1345,"html_description":"

Short, thoughtful and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.

","is_externally_hosted":false}}